The Commerce Department this morning reported a 2.8% drop in new orders for manufactured durable goods in May, a falloff that increased to 3.2% if the defense industries are excluded.

The drop was far larger than expected by financial markets, which were expecting a drop of less than 1%. Traders took the news as an indication of the slowdown in the U.S. economy that has been underway since early 2007.

According to the Census Bureau, a division of the Commerce Department, new durables orders decreased $6.1 billion or 2.8% to $213.0 billion, following three consecutive monthly increases including a 1.1% April increase.Excluding transportation, new orders decreased 1.0% and excluding defense, new orders decreased 3.2%. Transportation equipment, down two consecutive months, had the largest decrease, $4.5 billion or 6.8% to $62.4 billion, led by non-defense aircraft and parts, which decreased $4.1 billion.

On a brighter note, shipments of manufactured durable goods in May, up three consecutive months, increased $0.9 billion or 0.4% to $214.4 billion, following a 2.0% April increase. And unfilled orders, considered a barometer of future activity, increased $5.8 billion or 0.8 percent to$725.3 billion. This was at the highest level since the series was first stated in 1992 and followed a 1.9% April increase.

A key indictor of business spending, however, declined as non-defense new orders for capital goods fell 8.3% to $71.8 billion.