WRAPUP 2-Manufacturing may help fight off new U.S. recession

* U.S. manufacturing expansion faster than expected

* Factory hiring rises in September, but new orders weak

* Auto sales pace set to increase from August

* Reports imply economy might skirt new recession
(Adds details, byline, updates markets)

By Lucia Mutikani

WASHINGTON, Oct 3 (Reuters) - U.S. factories grew more
quickly in September as production and hiring increased,
suggesting that manufacturing would help keep the economy from
slipping into a new recession.

Other data on Monday offered more good news for the
troubled U.S. economy, with strong demand for new motor
vehicles putting sales on track to surpass August's rate, and
construction spending unexpectedly rebounding in August.

"That hardly sounds like an economy flat on its back. The
economy is still moving forward. But no one should confuse
direction with speed," said Joel Naroff, chief economist at
Naroff Economic Advisors in Holland, Pennsylvania.

September marked the 26th straight month of expansion in a
sector that has shouldered the broader economic recovery, and
the factory report implied that an outright contraction in
output would probably be avoided.

The Institute for Supply Management said its index of
national factory activity rose to 51.6 last month from 50.6 in
August, boosted by a rebound in production and increased
factory hiring. But new orders fell for third month.

Economists had expected the index to edge down to 50.5. A
reading above 50 indicates expansion in manufacturing.

The data was eclipsed in financial markets by Greece's
admission that it would miss its deficit target this year,
which weighed on stocks worldwide. See [ID:nL5E7L31G6] Prices
of U.S. Treasury debt rallied, while the dollar rose against a
basket of currencies.

Europe's worsening debt crisis has left the U.S. economy on
the edge of a new downturn. The economy grew at a 1.3 percent
annualized rate in the second quarter, an improvement from the
0.4 percent in the January-March period.

The growth in U.S. manufacturing is bucking a global trend.
Factory activity in Europe and Asia slumped in September to
levels not seen since the depths of the financial crisis as
export demand dropped. [ID:nL5E7L30K3]

The Global Manufacturing PMI, compiled by JPMorgan with
research and supply organizations, contracted for the first
time in over two years. [ID:nL5E7L337K]
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INSTANT VIEW - US ISM manufacturing PMI [ID:nN1E7920HT]

Graphic - U.S. and global manufacturing:

link.reuters.com/dar24s

Graphic - U.S. construction spending:

link.reuters.com/kar24s
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VEHICLE SALES, CONSTRUCTION SPENDING STRONG

The Federal Reserve last month announced a new measure
designed to push long-term borrowing costs lower by shifting
assets on its balance sheet to help the tentative economy.

Last week, Fed Chairman Ben Bernanke said the U.S. central
bank might need to ease monetary policy further if inflation or
inflation expectations fell significantly. [ID:nS1E78R1VZ]

For now, indications are that the economy will avoid a
recession and remain on a slow growth track, even as weak
incomes constrain consumer spending -- the main engine of
growth.

But households were more willing to spend on motor vehicles
last month. Reports so far from General Motors (GM.N), Chrysler
and Volkswagen (VOWG_p.DE) suggest sales could be about 8
percent higher than August's on a seasonally adjusted
annualized basis.

A separate report from the Commerce Department showed an
unexpected rebounded in construction spending in August as
outlays on state and local government building projects rose
sharply.

Construction spending rose 1.4 percent to an annual rate of
$799.15 billion, the Commerce Department said. Economists had
forecast a 0.3 percent drop.

"Spending should rise in the third quarter as a result of
post-(Hurricane) Irene repairs. Construction is set to add to
GDP growth in third and fourth quarter but the sector is still
very weak," said Ian Shepherdson, chief U.S. economist at High
Frequency Economics in Valhalla, New York.

Spending on non-residential structures rose in the second
quarter at its quickest pace since the third quarter of 2007.

Data last week showed that cash-rich U.S. businesses
continued to invest in machinery, a trend that economists
expect to hold and keep the economy expanding.

Manufacturing accounts for about 12 percent of gross
domestic product and almost 11 percent of nonfarm employment.

The tenor of the ISM manufacturing report was strengthened
by an increase in hiring last month, which could be a good omen
for Friday's employment report.

The economy failed to add jobs in August, leaving the
unemployment rate at a lofty 9.1 percent.

Other details of the factories survey showed production
rebounded last month after contracting in August. However, new
orders contracted for a third straight month, potentially
pointing to a pullback in manufacturing in the months ahead.

"The main concern going forward would be if new orders
didn't pick up," said Bradley J. Holcomb, chair of the ISM
manufacturing business survey committee in Dallas, Texas.

But inventories are growing at a slower pace and the ISM
viewed customers' supplies as too low, which should boost
future orders. In addition, orders for exports rose and
suppliers are taking a little bit longer to make deliveries to
manufacturers, which is also a good sign.
(Additional reporting by David Lawder in Washington, Ellen
Freilich in New York and Bernie Woodall in Detroit; Editing by
Dan Grebler)