Rising factory orders bolster recovery prospects

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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 the prospects for a sustained economic recovery.

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

"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 manufacturing inventories since a 15-month string that began in February 2001.

The draw-down in inventories 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.

The factory data comes 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 that rising unemployment could sap the 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 that 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 of third-quarter growth to a 3.1 percent pace.

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.

BUILDING BLOCK FOR GROWTH

The factory data came on the heels of a report from the Institute for Supply Management on Monday that showed U.S. factory activity hit its highest level in more than three years last month.

ISM's manufacturing gauge has now come in above 50 -- the dividing line between expansion and contraction -- for three months in a row.

There have been other signs that the building blocks of a recovery are in place.

Billionaire investor Warren Buffett on Tuesday called his $26 billion deal to buy the rest of U.S. railroad Burlington Northern Santa Fe Corp "an all-in wager on the economic future of the economy."

October sales reports from U.S. automakers suggested another bright spot.

Ford Motor Co said its U.S. sales rose 3.1 percent in October from a year earlier, and said it expected U.S. vehicle sales to come in about at about 10.6 million this year.

And General Motors Co reported its October sales rose 4 percent from a year earlier, the company's first year-on-year rise since January 2008, and said the U.S. economy and car industry were showing signs of recovery.

For a related story on the auto industry, please see

In other details from the Commerce Department's factory report, the closely watched inventory-to-sales ratio moved down to 1.36 from 1.38 in August; it was the lowest inventory-to-sales ratio since October of last year.

The factory orders report also showed an upwardly revised gain in orders for durable goods, long-lasting items that account for nearly half of overall orders, to 1.4 percent from the previously reported 1 percent increase.

Orders for non-durable items rose 0.6 percent in September, building on the 0.9 percent rise seen in August.

Pierre Ellis, senior economist at Decision Economics in New York, said the upward revision in durable goods orders was "heartening, but it's not a game changer. The game changer may come in October given the general strength in the ISM survey."

(Additional reporting by Richard Leong and Ellen Freilich in New York; Editing by Leslie Adler)

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