Orders placed with factories increased 0.7 percent during the month, led by demand for business equipment, following a 2 percent decline in April, the Commerce Department said yesterday in Washington.

A report from the largest paycheck processor, Automatic Data Processing Inc., showed U.S. employers added 368,000 jobs in June, the most since 2001.

The dollar and U.S. Treasury yields climbed as the reports added to speculation that the Fed will continue raising interest rates after 17 consecutive increases to cool the economy and ease inflationary pressures. Strong job growth and business investment may keep the economy expanding as the housing market and consumer spending slow down.

"The Fed has to see the economy as looking pretty healthy," Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, said in an interview. "Really, it's keeping the Fed focused on the inflation numbers and less convinced about a sharp slowing in the economy."

Economists expected factory orders to rise 0.1 percent, according to the median of 60 forecasts in a Bloomberg News survey, after an originally reported 1.8 percent decline in April. Estimates ranged from a drop of 0.5 percent to an increase of 1.5 percent. Excluding aircraft and other transportation equipment, factory orders rose 1.2 percent.

ADP's report prompted speculation that a government payrolls report on July 7 will show stronger jobs growth than economists expect. ADP says its report, produced with St. Louis- based Macroeconomic Advisers LLC, has a 90 percent correlation with the Labor Department's monthly payroll figures. Economists are expecting the government report to show payrolls grew last month by 160,000, according to the median estimate in a Bloomberg survey.

Employment gains have averaged 217,500 a month this year, ADP said. While the data spurred some economists to raise their forecasts for the government's June employment report, the Labor Department's figures don't always correlate closely. In February, the ADP said private employment rose 342,000 and the government's statistics showed a 168,000 increase.

The ADP report is released each month, two days before the government's payrolls statistics. The ADP data show changes in private business payrolls and exclude federal government hiring. The Labor Department's latest figures showed that non-government employment increased by 67,000 in May after a 117,000 rise a month earlier.

The ADP report heightens the odds that policy makers will raise rates again at their next meeting in August, Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an interview. Fed funds futures put the chance of an August increase at about 75 percent, up from 62 percent at the beginning of the week.

"The odds have gone back up after this ADP employment indicator we got today," Rupkey said. "The 368,000 increase is substantially above the consensus estimates out there" for the employment report due out this Friday, he said.

The Commerce Department's report showed bookings for durable goods, which account for about 55 percent of total orders, fell 0.2 percent after falling 4.7 percent in April. A preliminary report last week estimated the orders fell 0.3 percent in May. The decline in durable goods orders was due to an 18 percent drop in bookings for commercial aircraft.

Orders for capital goods excluding aircraft, a proxy for future business investment, rose 0.5 percent after falling 2.1 percent in April. Companies placed more orders for machinery, metals, and communications equipment. Capital goods shipments, which the government uses to calculate figures on gross domestic product, fell 0.3 percent after rising 0.4 percent.

Orders for non-durable goods, reported today for the first time, increased 1.6 percent in May after rising 1.1 percent the month before. Non-durable goods include industrial chemicals, drugs, papers and textiles. Orders increased for petroleum, chemicals, paper and food.

Higher energy prices helped increase the value of non- durable goods orders, economists said. Crude oil traded on the New York Mercantile Exchange averaged $70.96 a barrel in May, compared with $70.16 the month earlier. The higher oil prices, while pushing up the value of orders, also provide incentive to companies to strive for greater efficiency, economists said. At the same time, higher fuel costs limit consumer spending on other goods and services, while a rise in interest rates cools the housing market.

U.S. auto sales dropped 11 percent in June as General Motors Corp. and Ford Motor Co.'s declined for a fifth straight month, industry data showed July 3. Sales at DaimlerChrysler AG's Chrysler unit also fell. Higher gas prices this year have blunted demand for trucks, which account for a majority of sales at the three U.S.-based automakers. Rising energy prices have "had a tax-like effect in the consumer economy and has, as a result, contributed to the economic slowdown," said Richard DeKaser, chief economist at National City Corp. in Cleveland. Economic growth probably will slow to 2.9 percent by the fourth quarter, according to economists surveyed by Bloomberg News from May 30 to June 7. The economy expanded at a 5.6 percent rate in the first quarter, the fastest in more than two years.

A slowing in the economy at the same time inflation threatens to accelerate poses a challenge to Fed policy makers, who have raised interest rates 17 straight times beginning in June 2004.

After raising the target rate for overnight bank lending a quarter point to 5.25 percent on June 29, the Fed said in a statement that it "judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

Factory inventories were unchanged in May after rising 1 percent the month before. The inventory-to-shipments ratio fell to 1.15 months, matching a record low in December, from 1.17.

A report from the Institute for Supply Management earlier this week showed that factories cut inventories in June and manufacturing growth unexpectedly slowed. The report also showed new orders climbed, suggesting some strength going forward. Rogers Corp., which makes specialty materials for the computer, communications and defense industries, raised its profit forecast on June 29, citing improved sales. Transportation orders may rebound in coming months. Boeing Co., the world's No. 2 commercial-jet maker, said on June 29 that it won an order for five 737-700 planes from SkyEurope Airlines.