New orders for manufactured goods dropped last month for the first time since February, but the administration called the report no more than a temporary setback for the recovery.

While new orders declined by 1.7 percent, or $3 billion in July, the book value of manufacturers' inventories rose 0.4 percent, the largest monthly increase since November 1981 and indicating manufacturers are increasing production and rebuilding inventories depleted during the recession.

New orders reflect the goods that will be shipped within the next few months and help determine the level of future factory employment.

Commerce Secretary Malcolm Baldrige warned that the inventory rebuilding, financed by increased corporate short-term borrowing, "could put upward pressure on interest rates if government borrowing is not reduced quickly."

The decline in new orders, while generally not a good sign, followed a strong jump in orders in June. The drop was totally in the durable goods sector which is usually volatile. New orders for defense capital goods dropped $1.2 billion or 15.1 percent and orders for nondefense capital goods declined $2.7 billion or 11.3 percent.

Shipments of manufactured goods also declined $800 million or 0.5 percent in July. "The decline in shipments and a dip in new orders in July are most likely temporary setbacks," Baldrige said.

The increase in inventories follows the general pattern of recoveries, said Commerce Department chief economist Robert Ortner. Homebuilding usually leads the recovery and would have continued strongly if interest rates weren't so high, Ortner said. Consumer spending was strong earlier in the year and is beginning to taper off. The spurt in consumer activity is usually followed by a pick-up in business sector investment.

Ortner said the drop in orders was too premature to cause worrying that new orders may begin a permanent decline.

While it isn't unusual for the large spurts in economic activity, experienced in the last few months, to begin to level off, Ortner said he still expects strong GNP growth in the third quarter this year, but not quite as robust as the 9.2 percent growth rate during the second quarter.

However, Ortner said if new orders decline for the next few months it may be a warning that growth won't continue.

Despite the decline, new orders were $175.5 billion last month, the second highest level on record.