updated 10/2/2008 11:46:28 AM ET 2008-10-02T15:46:28

Orders to U.S. factories plunged by the largest amount in nearly two years in August as the credit strains began to hit manufacturing with full force.

Major Market Indices

The Commerce Department reported that orders for manufactured goods dropped by 4 percent in August, compared to July. That's a much worse performance than the 2.5 percent decline that economists had expected. It was the biggest setback since a 4.8 percent plunge in October 2006.

The weakness was led by big declines in orders for aircraft, down 38.1 percent, and autos, which fell by 10.6 percent, the worst performance in nearly six years.

Orders for non-defense capital goods excluding aircraft, considered a good indication of business investment plans, fell by 2.4 percent, the biggest setback in this category 19 months. It's an indication that businesses are slashing their investment plans in the weak economy, and growing credit strains are making it hard for companies to get loans to expand and modernize.

The Senate on Wednesday approved an administration-backed bill to provide $700 billion to the Treasury Department to buy bad mortgage debt from the financial system as a way to get banks to resume more normal lending operations.

Analysts are concerned that the economy is so stretched, however, that the country is headed for a recession even with the largest government market intervention since the Great Depression.

An earlier report Thursday showed the number of newly laid off workers filing new claims for unemployment benefits rose to 497,000 last week, an increase of 1,000 from the previous week. It was the highest level for jobless claims since just after the Sept. 11 terrorist attacks seven years ago.

The government is scheduled to release figures Friday on unemployment in September. The expectation is they will show layoffs rose by 100,000, the largest increase this year, with the unemployment rate holding at 6.1 percent.

The report on manufactured goods showed that durable goods, items expected to last three years, dropped by 4.8 percent in August. Orders for nondurable goods, items such as petroleum products, food and clothing, fell by 3.3 percent.

The dismal report on orders for August followed a report Wednesday from the Institute for Supply Management showing that manufacturing activity fell to the lowest level since the aftermath of the 2001 terrorist attacks.

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