By Lucia Mutikani
WASHINGTON (Reuters) - U.S. manufacturing activity in October hit a 2-1/2-year low, but a rise in new orders offered hope for a sector buffeted by a strong dollar and relentless spending cuts by energy companies.
Other data on Monday showed construction spending rose in September, indicating the economy remained on firmer ground despite signs of consumer spending cooling.
Given that manufacturing accounts for only 12 percent of the economy, analysts said it was unlikely to influence the U.S. Federal Reserve's decision whether to raise interest rates this year.
"We are marginally encouraged by a pickup in the new orders, but export orders continue to contract. We do not expect the manufacturing data will cause the Fed to push the first rate hike back into 2016," said John Ryding, chief economist at RDQ Economics in New York.
The Institute for Supply Management said its national manufacturing index slipped to 50.1 this month, the lowest level since May 2013, from a reading of 50.2 in September. The index is barely hanging above the 50 mark, the dividing line between expansion and contraction.
Manufacturers continued to cite the dollar's strength and low oil prices as headwinds. The new orders sub-index rose to 52.9 last month from 50.1 in September, but export orders continued to contract. There were modest improvements in supplier deliveries and backlog orders.
In addition, there was a decrease in the share of customers who believed inventories were too high, and the stock of unsold goods at factories also fell. Efforts by businesses to reduce an inventory overhang have weighed on factory activity.
The employment index contracted in October for the first time in six months, hitting its lowest level since August 2009, suggesting more weakness in factory payrolls.
"Overall, we view the ISM report as consistent with our view that the manufacturing sector is moving past the worst of the slump reported early on this year, but that conditions will likely remain soft as we see continued negative effects from the stronger dollar," said Daniel Silver, an economist at JPMorgan in New York.
That upbeat assessment was evident in a separate report from data firm Markit showing a pickup in factory activity last month.
U.S. stocks rose on the data, while prices of U.S. government debt fell. The dollar slipped against a basket of currencies after two members of the European Central Bank's governing council made remarks that lowered expectations the ECB would increase its bond-purchase program next month.
Seven manufacturing industries, including furniture and fabricated metal products, reported growth in October. Nine industries, including apparel, primary metals, petroleum and coal products, electrical equipment, appliances and components, machinery and transportation equipment, reported contraction.
The dollar has gained 16.8 percent against the currencies of the United States' main trading partners since June 2014, squeezing the profits of multinational companies like Procter & Gamble Co. (PG.N) and 3M Co. (MMM.N).
At the same time, a plunge in oil prices has pressured revenues for oil field companies like Schlumberger (SLB.N) and diversified manufacturer Caterpillar Inc (CAT.N).
In a separate report, the Commerce Department said construction spending advanced 0.6 percent to its highest level since March 2008, after increasing 0.7 percent in August.
Construction spending has increased every month this year.
Data last week suggested consumer spending lost momentum at the end of the third quarter, with consumption in September posting its smallest increase in eight months.
In September, construction spending was boosted by a 0.6 percent rise in private construction spending, which hit its highest level since January 2008.
Spending on private residential construction jumped 1.9 percent in September, also reaching the highest level since January 2008, reflecting gains in home building and renovations.
"These numbers bode well for residential investment in the fourth quarter," said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York.
"We expect that gradually firming wage growth, continued employment gains, and very solid consumer confidence will strengthen housing demand and lead to stronger housing activity in the coming months."
Investment on private non-residential construction projects, however, fell 0.7 percent. Public construction outlays gained 0.7 percent, with spending on state and local government projects increasing 0.9 percent. Federal government outlays declined 1.0 percent.
(Reporting by Lucia Mutikani; Editing by Paul Simao)