Orders for factory goods in October chalked up their first increase since May, thanks in part to Washington's defense spending, but some economists are stopping short of declaring the manufacturing sector in full turnaround mode.

Recent numbers coming from the government look solid. New orders for manufactured goods jumped 7.1% to $333.2 billion, following a 6.5% decline in September, the Department of Commerce said Thursday. Shipments increased 2.2%, following a 4.7% decrease in September, while inventories, down for nine consecutive months, fell 0.4%, following a 0.9% decline the previous month. But as is always the case, some market watchers want to see more signs of improvement before they make any pronouncements of certainty.

"A lot of what we've seen is a bounce back of the drop from Sept. 11," said Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein. "So are we still on a downtrend? It's hard to say. We could be bottoming, but it could be a rebound that could fade."

The latest factory orders data were released just days after the

National Association of Purchasing Management said its index of manufacturing activity rose to 44.5 in November, well above expectations and up from 39.8 in October. New orders also rose a hearty 10.5% to 48.8, suggesting that the manufacturing sector may be turning around. Still, a figure under 50 signals an overall contraction.

Separately, the Labor Department said this morning that first-time claims for jobless benefits fell 18,000, to 475,000, in the week ended Dec. 1. Additionally, U.S. worker productivity grew at a weaker-than-anticipated 1.5% pace in the third quarter. Productivity growth was revised down from the 2.7% increase initially estimated. The number of hours workers spent on the job fell at the fastest rate in more than a decade. Economists were expecting nonfarm productivity growth of 2.1% for the quarter.

In the last two months, equity investors have seized any data that point to a pending recovery as an opportunity to buy. The major market averages, the

Dow Jones Industrial Average, the

Nasdaq Composite and the

S&P 500, have been steadily climbing since late September. The indices, which jumped sharply during the last two trading days, started out the next-to-last session of the week slightly lower, but by midday, all three measures were posting gains.

Old Optimists Don't Die

The manufacturing sector was the first area of the economy to fall into a recession. Besides the November NAPM report, the latest

durable goods report, released last week by the Commerce Department, showed improvement. New orders for manufactured durable goods rose 12.8%, and 3.4% excluding transportation, but those readings were still significantly below year-ago levels.

While some economists remain cautious about predicting a recovery, Wall Street has been more optimistic. The market has been rallying on hopes for a turnaround in 2002, as evidenced by the strong gains in economically sensitive stocks. Besides tech outfits, manufacturing companies such as

Eaton

(ETN) - Get Report

and

Johnson Controls

(JCI) - Get Report

have seen impressive gains in their stock prices since late September. Eaton has gained almost 26% since Sept. 21, when the market hit its lowest point following the terrorist attacks in New York and Washington, while Johnson has risen 37%.

"The market is having the tendency to see all U.S. economic data in a positive light," said David Durrant, economist at Julius Baer Asset Management. "But you don't have to be a pessimist to stand back and realize that something's very, very, amiss in some of the pricing."

Jingo Bells

The government's spending on defense was one reason for the stronger factory orders report. Defense orders rose on a 490% increase in military aircraft and parts to $15.3 billion. Excluding defense orders, total orders rose 3.3% to $313.7 billion.

Meanwhile, transportation orders rose 38.9% on a modest 4.6% gain in orders for motor vehicles. Excluding all transportation orders, total factory orders rose 2%.

The orders for new aircraft by the government were in the pipeline for a long time, said Logan, who added that the spike in defense spending didn't have much to do with the events of Sept. 11 or the war in Afghanistan.

Logan predicted that though future increases in defense spending could boost the economy "it's going to be modest and in no way parallel to World War II or even the Vietnam War."

Fed Games

The

Federal Reserve will be examining the latest indications of growth in the manufacturing sector, among other facets of the economy, when the

Federal Open Market Committee meets Tuesday.

Most experts believe

Alan Greenspan and the gang will continue their rate-reduction spree, cutting the

fed funds rate by another 25 basis points to 1.75% in what would be the 11th cut of the year.

While lower interest rates are one justification for the recent strength of equities, it may not ensure a strong rebound in the economy or in profits, Logan said.

"The market has lower interest rates going for it, and so valuations can be higher," he said. "But we may see that profits in 2002 may not be as satisfying as hoped. Chances are that the economy rebounding strongly aren't very high."