U.S. businesses stepped up investment spending in August despite the upheaval caused by bitter political fighting in Washington, and some economists raised their forecast for economic growth for this quarter.

The Commerce Department said on Wednesday that non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, increased 1.1 percent after falling 0.2 percent in July.

That was well above economists' expectations for a 0.3 percent rise and suggested that businesses, sitting on about $2 trillion in cash, had not responded to the recent financial market volatility by curtailing investment.

If we were in a recession we would expect to see business orders for capital goods plummeting and they are not, said Richard DeKaser, an economist at Parthenon Group in Boston.

The solid rise in investment spending, which was accompanied by a 2.8 percent rise in shipments of capital goods, prompted some economists to raise forecasts for third-quarter economic growth.

JPMorgan lifted its GDP growth forecast to an annual rate of 1.5 percent from 1.0 percent, while forecasting firm Macroeconomic Advisers raised their projection to 2.1 percent from 1.7 percent.

Shipments of civilian capital goods orders excluding aircraft go into the calculation of gross domestic product.

While we don't yet know the split between how much went to domestic versus foreign buyers, this almost certainly implies another solid quarter for capital equipment spending, said Michael Feroli, an economist at JPMorgan in New York.

Stocks on Wall Street initially rose on the data, but gave up gains to trade flat ahead of an audit of Greece's finances to decide whether the nation gets more aid to avoid bankruptcy. Prices for Treasury debt fell, while the dollar rose broadly.

Extreme volatility in financial markets, as politicians in Washington fought over budget policy and Europe struggled to come to grips with its debt crisis, has knocked confidence and raised the risk of a new U.S. recession.

But businesses are showing some confidence in the recovery.

Tech companies, including Intel Corp, International Business Machines Corp and Taiwan Semiconductor Manufacturing Co, this week said they would collectively invest $4.4 billion in facilities developing a new generation of computer chips in New York State.

And last week General Motors Co, the largest U.S. automaker, announced it would invest $2.5 billion in its domestic plants after reaching a labor contract accord.

While businesses are investing in machinery, they have been cautious on hiring. Nonfarm employment failed to grow in September for the first time in a year.

Poisonous political dialogue and the attacks on business led people to be predictably very cautious, not investing, not wanting to hire, said Blackstone Group chief Stephen Schwarzman at the Lincoln Center Dialogue breakfast series. The general uncertainty has basically frozen the economy.

MANUFACTURING RESILIENT

Although business spending plans point to continued growth, the report also confirmed a slowing trend in manufacturing.

Overall orders for durable goods -- items ranging from toasters to aircraft meant to last three years or more -- dipped 0.1 percent after a 4.1 percent jump in July.

Orders were held back by an 8.5 percent drop in bookings for motor vehicles -- the largest decline since February last year. Economists, however, blamed the fall on the seasonal adjustment to account for the rollout of new models, which normally happens in August.

The drop in orders, which are quite volatile from month to month, came despite a 23.5 percent rise in orders for civilian aircraft.

Boeing received 127 orders for aircraft, according to the plane maker's web site, up from 115 in July, with Delta Airlines placing an order for 100 planes.

Excluding transportation, orders also slipped 0.1 percent after rising 0.7 percent in July.

But outside of transportation and primary metals, which fell 0.8 percent because of weak commodity prices, details of the report were relatively strong.

Orders for machinery edged up 0.1 percent, while computers and electronic products, capital goods and electrical equipment and appliances rose solidly.

Other details of the report were also supportive of growth, with unfilled orders posting a healthy increase -- indicating factories will keep busy for a while.

In addition, inventories advanced to a record high of $365.3 billion. While that should support third-quarter growth, analysts worried businesses might find themselves with too much stock and could cut back on orders, hurting the fragile economy.

Unwanted inventory growth is the stuff that turns business expansions into recessions and we are seeing total inventories build at a pace relative to new orders that seems not to be by design, said Steve Blitz, a senior economist at ITG Investment Research in New York.

(Additional reporting by Scott Malone in Boston and Ben Klayman in Detroit; Editing by Neil Stempleman)