Rising factory orders bolster recovery prospects

By Lisa Lambert

WASHINGTON (Reuters) - U.S. factory orders rose a stronger-than-expected 0.9 percent in September, and inventories continued to shrink, bolstering prospects for a sustained economic recovery.

It was the fifth month out of the past six U.S. manufacturers saw orders rise, the Commerce Department said on Tuesday. Analysts had expected a 0.8 percent increase.

"It's a solid rise in orders. They are consistent with manufacturing growing again," said James O'Sullivan, chief economist for MF Global in New York. "Inventories are still falling so there is more room for orders and production to grow."

Factories cut their stocks by 1 percent in September, the 13th straight month of declines in manufacturing inventories. It is the longest streak of falling inventories since a 15-month string that began in February 2001.

The draw-down is good news because it makes it more likely that any future spending will drive new output.

U.S. stock indexes pared losses on the news, but the data was overshadowed by a downgrade of the semiconductor sector and a shake-up at two big British banks. The dollar rose on a safe-haven bid driven by those concerns.

RECOVERY WORRIES

The factory data followed a week after the government reported the U.S. economy grew at a 3.5 percent annual rate in the third quarter, snapping four straight quarters of contraction and signaling an end to the nation's deepest recession since the Great Depression.

Worries about the sustainability of the stimulus-led recovery remain, however, with analysts warning rising unemployment could sap consumer spending that drives the economy. The U.S. government will report on the jobless rate on Friday, which analysts expect to have risen to 9.9 percent in October from a 26-year high of 9.8 percent in September.

And even Tuesday's data on factory orders and inventories raised questions by some analysts about the strength of the recovery.

Because the factory orders report showed a sharper cut in inventories than the Commerce Department had reported last week, analysts said it implied third-quarter economic growth was weaker than the government's initial estimate.

The Commerce Department said last week that a slowdown in the rate at which businesses were liquidating inventories in the second quarter added nearly a percentage point to the increase in U.S. gross domestic product.

Based on Tuesday's factory data, JPMorgan Securities Global Economic Research said it cut its estimate for third-quarter growth to 3.1 percent.

Concerns about a fragile recovery will likely inspire the U.S. Federal Reserve to move cautiously at its two-day policy meeting that began on Tuesday afternoon. The Fed is expected to maintain its commitment to hold benchmark interest rates exceptionally low. For a related story, please see.

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