By Timothy R. Homan Oct. 2 (Bloomberg) -- Orders to U.S. factories decreased in August by the most in almost two years, signaling business spending slowed down even before the recent worsening of the credit crunch. The 4 percent drop in bookings was larger than forecast and followed a revised 0.7 percent increase in July that was smaller than previously estimated, the Commerce Department said today in Washington. A separate report showed the total number of Americans collecting jobless benefits rose to the highest level in five years. Banks have become reluctant to lend as losses mount, making it harder for companies to obtain the financing needed to investment in new equipment. Exports, which had made up for a slowdown in U.S. sales, are likely to weaken in coming months as growth in Europe and Japan also falters. ``The economy deteriorated dramatically during the third quarter,'' Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, said before the report. ``The present financial crisis will tighten credit further, hitting an economy that was already on the way down.'' Economists forecast factory orders for August would drop 3 percent after a previously reported 1.3 percent gain in July, according to the median estimate of 59 economists in a Bloomberg News survey. Estimates ranged from a drop of 6 percent to an increase of 0.5 percent. U.S. stocks extended losses after the report. The Standard & Poor's 500 Index dropped 27.61, or 2.4 percent, to 1133.45 at 10:10 a.m. in New York. Labor Market The number of people collecting jobless benefits rose to 3.59 million in the week ended Sept. 20, the most since 2003, the Labor Department reported today. First-time claims reached a seven-year high in the week ended Sept. 27, reflecting job losses in the aftermath of the Gulf Coast hurricanes. Excluding demand for transportation equipment, which tends to be volatile, factory orders decreased 3.3 percent, the most since September 2001 when terrorists attacked the World Trade Center and the Pentagon. Bookings for all durable goods, which make up just under half of total orders, fell 4.8 percent in August, more than the Commerce Department estimated last week. Non-durable goods orders, including those for food, petroleum and chemicals, dropped 3.3 percent after. Today's revision also made the outlook for business investment even dimmer. Bookings for capital goods excluding defense and aircraft, a proxy for future business spending, fell 2.4 percent in August compared with the 2 percent decline estimated last week. Shipments Fall Shipments of such goods, which the government uses to calculate gross domestic product, decreased 2.1 percent, also worse than previously estimated and the biggest drop since January 2007. A private report yesterday showed the slump may have worsened last month. Manufacturing contracted in September at the fastest pace since the 2001 recession, according to the Institute for Supply Management. Orders, production and employment all dropped and exports rose at the slowest pace in two years. ``I just can't imagine that we'll see a lot strength in the index in the next few months,'' Norbert Ore, chairman of the ISM survey, said yesterday in a conference call from Atlanta. ``Manufacturing has weathered this downturn in the economy quite well, to this point.'' The slowdown in overseas demand threatens to undermine one of the last remaining bright spots for the economy. A narrowing of the trade gap last quarter added 2.9 percentage points to growth, the biggest contribution since 1980, the Commerce Department said last month. Business Spending Excluding trade, the economy would have contracted at a 0.1 percent pace from April through June, instead of the 2.8 percent pace of expansion. Business spending on new equipment and software dropped at a 5 percent annual pace during the second quarter, the most in six years, Commerce also said. A slowdown in factory orders is forcing some companies to trim payrolls. Rockwell Automation Inc., the world's largest maker of factory automation products, said this week it will cut about 3 percent of its 20,000-member workforce immediately to reduce costs. Keith Nosbusch, chief executive officer of the Milwaukee- based company, said in July that slower demand hurt profit for the quarter ended June 30. To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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