The economy continued to show further signs of weakness ahead of Friday's widely anticipated report on September job growth.
Orders to U.S. factories fell in August by the largest amount in seven months, reflecting weakness across a wide swath of manufacturing, while jobless claims were higher than expected last week.
The Commerce Department said that orders dropped by 3.3% last month, even worse than the 2.8% decline that had been expected. It was the biggest setback since orders fell 4.2% in January.
The fall-off was led by a huge plunge in demand for commercial aircraft, which fell by 39.9%. However, orders were also weak in a number of other industries, from autos to industrial machinery and home appliances.
Orders for durable goods, items expected to last at least three years, fell by 4.9%, while demand for nondurable goods, items such as food, clothing and gasoline, fell by 1.6%.
Economists are worried that the steepest housing slump in 16 years and the biggest credit crunch in nearly a decade could push the country into a full-blown recession.
Jobless Claims Rise
In other news, the Labor Department said that the number of newly laid off workers filing claims for unemployment benefits shot up by 16,000 to a total of 317,000. The gain was the largest one-week rise in four months and was bigger than analysts had expected.
Labor Department analysts said that the two-day auto strike involving General Motors Corp. did not appear to have a significant impact on the claims figures last week, according to preliminary information from the states.
Analysts believe the unemployment rate probably rose in September to 4.7 percent, up from 4.6 percent in August, although they are expecting that businesses added 100,000 jobs to their payrolls.
That would be an improvement from the net loss of 4,000 jobs in August, which had been the first monthly job loss in four years. The employment data for September will be released on Friday.
The unemployment report is being closely followed by Wall Street, where investors believe it will provide the key piece of data the Federal Reserve will need to decide whether to cut interest rates further.
Fed Cut Rates
After the surprisingly bad August jobs report was released, the Fed decided to cut a key interest rate for the first time in four years, reducing it by a larger-than-expected half-point.
The drop in factory orders included big declines in two industries closely connected to the housing industry. Demand for home appliances fell by 7.2 percent while orders for furniture were down by 4.4 percent.
Many economists believe aggressive Fed action is needed to keep the economy from sliding into a recession. Overall economic growth is expected to have slowed to around 2.5 percent in the July-September quarter with a further decrease to 2 percent or less expected in the current quarter.
Former Federal Reserve Chairman Alan Greenspan, who put the risks of a recessionat about 30 percent at the beginning of the year, has said more recently that the steep housing slump and financial market turmoil in August have pushed that chance up although he said the risk still remain below 50 percent.