Bloomberg News

WASHINGTON - Orders placed with U.S. manufacturers showed the largest drop on record in July as demand fell for aircraft, military hardware, and electronic equipment, a government report showed.

Orders declined 7.5%, to $377.6 billion, more than reversing a revised 5.2% June gain, the Commerce Department said. The previous record of 6.6% was set in December 1974.

A separate report by the National Association of Pur chasing Management-Chicago showed manufacturing in the Chicago area contracted for the first time since January 1999 as new orders and production declined.

"We've probably seen the best of times" for manufacturing, said Kenneth Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. "The economy is headed toward a significant slowdown in growth."

The Chicago purchasers' index fell to 46.5 last month - the lowest level since February 1996 - from July's 52. The prices-paid index dropped to 58.6, from 70 in July.

Stocks and government securities rose after the reports suggested the economy is slowing, which could allow the Federal Reserve to hold the line on interest rates for the rest of the year.

The government's report showed orders, excluding transportation equipment, declined 2.6% in July after no change in June. Total factory orders in the first seven months of this year rose 9.5% from the same period last year. Analysts had forecast a 7% drop in July, to $380.5 billion, after a previously reported increase of 5.5% June.

Manufacturing, which generates about one-fifth of the nation's output and employs millions of workers, has been on the mend since 1998, when Asian countries were barely growing or in recession. Economic recoveries since then and a record U.S. economic expansion have kept factories busy, even under the weight of a series of Federal Reserve interest rate increases.

Orders rose at a 26.1% annual rate in the second quarter, compared with 6% in the first quarter and 22.3% in the fourth.

July's decrease was paced by a 49.2% drop in orders for civilian aircraft, after an 85.3% surge the month before. Defense orders dropped 70.7%, after a 176.1% surge in June.

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