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U.S. factory orders weak; robust auto sales a bright spot

Chrysler Group LLC assembly worker Richard Rudolph puts together an engine for a 2014 Ram 1500 pickup truck on the assembly line at the Warren Truck Plant during a tour of the plants redesigned work stations in Warren, Michigan, September 25, 2014. REUTERS/Rebecca Cook

By Lucia Mutikani

WASHINGTON (Reuters) - New orders for U.S. factory goods fell in April on weak demand for transportation equipment and other goods, suggesting that manufacturing remained constrained by a strong dollar and spending cuts in the energy sector.

The outlook for manufacturing and the broader economy, however, got a lift from another report on Tuesday showing automobile sales in May rising at their briskest pace in a decade.

"The outlook for manufacturing is modestly positive. Demand from consumers and businesses is growing slowly. Households are gradually boosting their spending on manufactured goods," said Gus Faucher, a senior economist at PNC Financial in Pittsburgh.

New orders for manufactured goods slipped 0.4 percent after increasing 2.2 percent in March. Factory orders have declined in eight of the last nine months. Economists had forecast orders to be unchanged in April. Excluding the volatile transport component, orders were flat for a second straight month.

Manufacturing, which accounts for about 12 percent of the U.S. economy, has been hit by the dollar and lower crude oil prices, which are pressuring the profits of multinational corporations and oil-field firms.

Orders for transportation equipment fell 2.4 percent in April. There also were declines in orders for information technology equipment, computers and related products, and consumer goods.

Separately, auto sales last month rose to a seasonally adjusted annual rate of 17.79 million units, the strongest since summer 2005, up from a 16.50 million-unit pace in April.

General Motors Co (GM.N) reported a 3 percent increase. Fiat Chrysler Automobiles (FCAU.N) (FCHA.MI) said sales rose 4 percent. Ford Motor Co's (F.N) sales, however, fell 1 percent as demand for its F-Series pickup trucks slackened.

Strong auto sales could buoy May consumer spending, which was flat in April after households cut back on purchases of motor vehicles. A rebound in consumer spending, which accounts for more than two-thirds of U.S. economic activity, is being eyed after slowing down sharply in the first quarter.

Consumer spending was sluggish even as households got a boost from cheaper gasoline and steadily rising wages.

CAUTIOUSLY OPTIMISTIC

"We have been looking for a bounce back in consumption growth following the puzzlingly weak April data and today's sales reports from auto manufacturers suggest these gains are starting to materialize," said Jesse Hurwitz, an economist at Barclays in New York.

The dollar fell sharply against the euro on hopes that Greece would reach a deal with its creditors. Prices for U.S. government also dropped, while U.S. stocks rose marginally.

There is cautious hope that consumer spending will offset the drag on growth from continued cutbacks in business spending.

Gross domestic product contracted at a 0.7 percent annual rate in the first three months of the year.

Federal Reserve board member Lael Brainard warned on Tuesday the economic weakness at the start of the year could be more than transitory, citing the dollar and sluggish business investment.

The Commerce Department also said orders for non-defense capital goods excluding aircraft, which are seen as a measure of business confidence and spending plans, fell 0.3 percent in April instead of the 1.0 percent advance reported last month.

Shipments of these so-called core capital goods, which are used to calculate business equipment spending in the gross domestic product report, were revised down to show only a 0.5 percent gain in April instead of the previously reported 0.8 percent rise.

Lower oil prices prompted Schlumberger (SLB.N), the world's top oil-field services provider, and rival Halliburton (HAL.N) to slash their capital expenditure for this year.

Multinational corporations including Procter & Gamble Co (PG.N), the world's largest household products maker, and Whirlpool Corp (WHR.N), the global home appliances giant, have warned that the dollar will hurt profits this year.

But there are signs the downturn could be nearing its end as the dollar rally fades, the supply chain normalizes after being disrupted by a labor dispute at West Coast ports and business spending outside the energy sector picks up.

A report on Monday showed factory activity rising for the first time in seven months in May and new orders increasing solidly.

"We are moving past the weakest period for energy-related capex ... which should be a positive development for the manufacturing sector," said Daniel Silver, an economist at JPMorgan in New York.

(Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama)