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Jump in factory orders stirs hope for stronger economic growth

Factory orders are picking up and the economy may soon follow.

A rise in demand for long-lasting manufactured goods in May suggests the parts shortage stemming from the Japan crises is fading. It would also support the view offered by many economists, who have suggested that the economic slowdown is temporary and that growth will strengthen this summer after six dismal months.

Still, the projected growth won't be enough to make a noticeable dent in the unemployment rate, which was 9.1 percent last month.

The economy grew at an annual rate of 1.9 percent in the first three months of the year, according to the Commerce Department's third and final estimate. Economists don't expect much better growth in the current April-June quarter, which ends next week. An Associated Press survey of 38 top economists predicts that rate will be about 2.3 percent.

Economists have largely blamed the sluggish stretch on high gas prices, which have come down since peaking in early May. They have also cited the impact of the March 11th earthquake and tsunami in Japan, which has led to supply disruptions that have hampered U.S. manufacturers.

Factory production is starting to rev back up. Durable goods orders rose 1.9 percent, the Commerce Department said. Companies stepped up requests for machinery, computers and cars, and a key category that measures future business investment rose.

It was a solid turnaround after orders fell 2.7 percent in April, at the height of the parts shortage. A durable good is a product that is designed to last at least three years.

The report also showed a modest increase in business stockpiles. Companies typically build up their supplies when they think consumers will step up their purchases.

But David Wyss, former chief economist at Standard & Poor's and now a visiting fellow at Brown University, said many businesses were caught with low stock levels when the crisis in Japan disrupted supply chains.

"The supply chain problems have convinced a lot of companies that just-in-time inventory management has a problem because the inventories don't always show up just in time," Wyss said. "I believe some companies will switch to a just-in-case approach where they hold larger stockpiles."

Manufacturing is closely watched because it has the potential to fuel hiring and boost growth.

Growth must be stronger to significantly lower the unemployment rate. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.

Employers added only 54,000 net new jobs in May, much slower than the average gain of 220,000 per month in the previous three months. The expectations for June are slightly better.

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