UPDATE 2-U.S. factory orders tumble again

(adds comments by Dallas Fed President Fisher, details; updates market quotes)

By Glenn Somerville

WASHINGTON, Nov 4 (Reuters) - New orders received by U.S. factories tumbled for a second straight month in September, underscoring the grim economy awaiting the winner of Tuesday's presidential election.

Overall factory orders dropped 2.5 percent to a seasonally adjusted $432 billion, according to a Commerce Department report. Economists expected a more modest 0.8 percent fall and the sharp drop in orders follows a 4.3 percent plunge in August orders, which was originally reported as a 4 percent decline.

Excluding transportation, orders plummeted a record 3.7 percent in September after a 3.6 percent August drop.

"It's a deeply negative report. Overall, this is setting the economy up for a very bleak fourth quarter," said Kurt Karl, the chief U.S. economist at Swiss Re in New York.

The report adds to signs of a rapid downturn sweeping manufacturing in the United States, which earlier this year was somewhat shielded from the housing crash and credit freeze thanks to overseas demand.

Now, factories may be suffering as the U.S. dollar strengthens, making U.S. exports less competitive while slowing European economies slow cut demand for U.S. goods.

The president of the regional Dallas Federal Reserve Bank, Richard Fisher, told an audience in Grapevine, Tex., that a fresh fiscal economic stimulus was needed now because the U.S. central bank was nearing its limits in cutting interest rates.

The U.S. central bank cut its trend-setting federal funds rate a half percentage point to 1 percent on Oct. 29, its lowest level since June 2004, in a bid to stave off recession.

But Fisher said the economy may contract later this year and in 2009 because the housing market remained in disarray.

"The credit crisis has reached up and clutched the throat of the economy," Fisher said.

On Monday, the Institute for Supply Management said its index of U.S. factory activity sank to its lowest reading in 26 years, confirming for many economists that the world's largest economy was shrinking.

Commerce reported that orders for motor vehicles and parts rose 3.3 percent in September after an 8.9 percent drop in August. That seems unlikely to continue given that carmakers reported that sales in October dived to the lowest in a quarter century and dealers' lots are stuffed with unsold vehicles.

Wall Street shook off the negative data to focus more on signs that credit markets were thawing. Share prices remained solidly higher in late trading and prices for longer-dated U.S. Treasury debt securities also moved higher.

Orders for primary metals that are basic to manufacturing fell 4.6 percent in September after plunging 12.5 percent in August. Computer orders were down 1.8 percent, nearly reversing a 1.9 percent August rise.

Machinery orders edged up 0.9 percent in September, though it came after a big 6.6 percent August fall and nondefense capital goods orders were ahead 0.8 percent following a 7.8 percent August drop. (Reporting by Glenn Somerville; Editing by Diane Craft)