Dec. 5 (Bloomberg) -- Orders at U.S. factories unexpectedly rose in October, reflecting a jump in commodity costs that's contributing to a slowdown in growth.

The 0.5 percent gain in demand was the biggest since July and followed a revised 0.3 percent increase for September, the Commerce Department said today in Washington. The rise was led by a 1.8 percent jump in petroleum shipments that reflected climbing prices.

Higher fuel costs, the slumping housing market and increased credit restrictions will slow consumer and business spending and cause the economy to nearly stall this quarter, economists said. Export gains alone won't be enough to shield factories from the cooling in demand.

``It looks like what gains we got in orders were due to high prices,'' said Nigel Gault chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. The report is ``totally consistent with the manufacturing side slowing down.''

Economists forecast orders would be unchanged, according to the median of 64 estimates in a Bloomberg News survey. Projections ranged from a decline of 0.7 percent to a gain of 0.6 percent. Excluding transportation equipment, such as cars and airplanes, demand increased 0.6 percent.

Reports released earlier today showed worker efficiency accelerated last quarter and the economy may have created more jobs than forecast in November. Productivity rose at a 6.3 percent pace from July though September, the most in four years, the Labor Department said. A report from ADP Employer Services projected U.S. companies added 189,000 employees to payrolls.

Non-Durables Jump

The increase in today's factory orders report was lead by a 1.3 percent rise in shipments of non-durable goods. In addition to petroleum, demand for chemicals, plastics and beverages and tobacco products also climbed.

Rising crude oil prices helped push up the value of petroleum orders. Crude oil traded on the New York Mercantile Exchange reached a record closing price of $98.18 a barrel on Nov. 23. Steel prices and other commodity costs also have risen.

``We know that oil prices were up a ton and these data are revenues, not units,'' said David Resler, chief economist at Nomura Securities International in New York. ``Companies are getting more cautious about the outlook. Growing numbers of companies are having trouble financing the expansion plans they have and they're facing declining orders.'' Resler forecast orders would increase 0.5 percent.

Durables Drop

Orders for durable goods, which make up just over half of total factory demand, dropped 0.2 percent, less than estimated by the Commerce Department last week, after a 1.4 percent decline the prior month. Bookings for automobiles and parts fell 0.5 percent.

General Motors Corp., the world's largest automaker, trimmed its first-quarter North American production plan by 11 percent this week after sales fell 11 percent in November compared with the same month last year. Ford Motor Co. also cut its first-quarter production plan by 7.4 percent from year- earlier levels.

Ford, the second-biggest U.S. automaker, will ``adjust our production to the real demand,'' Chief Executive Officer Alan Mulally said at a ceremony for the signing of a new labor contract with the United Auto Workers union. Mulally also said the company will ``continue to watch'' economic changes ``carefully.''

Less Investment

Revised figures for September showed business investment plans weakened to start of the fourth quarter. Orders for non- defense capital goods excluding aircraft, a proxy for future business spending, dropped 2 percent. Shipments of those goods, used in calculating gross domestic product, fell 0.9 percent after rising 1.8 percent in September.

Factory inventories increased 0.1 percent, compared with a 0.6 percent increase a month earlier. Manufacturers had enough goods on hand to last 1.23 months, compared with 1.24 months in September.

Private and Federal Reserve reports have confirmed manufacturing is slowing. The Institute for Supply Management's national factory index fell to 50.8, the lowest in 10 months and weighed down by decreases in employment and inventories. Production at factories, mines and utilities unexpectedly dropped in October, according to figures from the Fed.

The Tempe, Arizona-based Institute for Supply Management's report on service industries today showed non-manufacturing expanded in November at the slowest pace in eight months pace as orders cooled.

Forecasts Lowered

Economists lowered fourth-quarter growth forecasts after reports last month showed inventories grew more last quarter than previously estimated, while consumer spending slowed in October and orders for durable good dropped.

Lehman Brothers Holdings Inc. projects the economy will expand at a 0.8 percent annual rate from October through December, down from a 4.9 percent pace in the previous three months. Economists at Bank of America Corp. forecast growth could be as low as 0.1 percent.

``Uncertainty surrounding the outlook'' is ``even greater than usual,'' Fed Chairman Ben S. Bernanke said Nov. 30. That will require central bankers to be ``exceptionally alert and flexible,'' he said.

Federal funds futures show traders project a 100 percent chance of a reduction in the benchmark rate next week, with a XX percent probability of a half-point move.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.netJoe Richter in Washington Jrichter1@bloomberg.net

Last Updated: December 5, 2007 11:40 EST