U.S. Jan factory orders record first drop in 5 months

WASHINGTON (Reuters) - New orders at U.S. factories fell 2.5 percent in January, in line with expectations and the first decline since August, a Commerce Department report showed on Wednesday.

The drop reinforces concern the U.S. economy is headed for recession. The Institute for Supply Management said on Monday its index of national factory activity fell to 48.3 in February from 50.7 in January.

That was the weakest reading since April 2003, the month after the start of the Iraq war, and was also below the level of 50 that separates growth from contraction.

The Commerce Department said new orders for durable goods, items intended to last three years or long, fell 5.1 percent in January after two consecutive monthly increases. That was revised from the 5.3 percent decline reported last week.

When the volatile transportation component was stripped out, factory orders declined by a more modest 0.4 percent. Orders for civilian aircraft fell 30.4 percent in January, after rising 9.0 percent in December.

Non-defense capital goods orders excluding aircraft, considered a gauge of business spending, declined 1.5 percent, revised from a 1.4 percent drop reported last week.

U.S. financial markets focused more on a report on the service sector, which accounts for about 80 percent of U.S. economic activity.

U.S. government debt prices pared gains after the ISM reported that the services sector was not as weak as expected.

The dollar rose against the yen and U.S. stocks also rose on the ISM data.

(Reporting by Doug Palmer, Editing by Neil Stempleman)