New orders for U.S. manufactured goods and a gauge of business spending plans rose in May, easing fears of a sharp slowdown in factory activity.

Durable goods orders increased 1.9 percent after dropping 2.7 percent in April, the Commerce Department said on Friday, with a proxy of business spending also rebounding strongly.

An improvement across the board in May and revisions to April's figures that showed smaller declines than previously reported, pointed to underlying strength in a sector that has powered the economic recovery.

Economists had expected durable goods orders, a leading indicator of manufacturing health, to rise 1.5 percent in May. Durable goods are items ranging from toasters to aircraft that are meant to last three years or more.

The report came as a relief to investors after recent regional factory data had shown some signs of fatigue.

Supply chain disruptions after the March earthquake and tsunami in Japan have been constraining production and Friday's data suggested the impact of the disasters might be waning.

The durable goods report also suggested the economy was likely to regain momentum later in the year.

This supports our view that the economic 'soft patch' will not endure meaningfully into the second half, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York.

It also leads us to wonder whether the recent, sharp declines in various production gauges, such as the New York Empire and Philly Fed surveys, were a reaction to negative news earlier in the quarter.

The better-than-expected report helped to curb losses on Wall Street, where stocks fell on concerns about the Italian banking sector and uncertainty about passage of a Greek austerity plan.

Prices for U.S. government debt were mostly up, while the dollar rose against a basket of major currencies.

GROWTH REVISED A TOUCH HIGHER

Despite its leading role, manufacturing only accounts for about 11.7 percent of U.S. gross domestic product and roughly 9 percent of total employment.

Both the Obama Administration and business leaders would like manufacturing to once again become the mainstay of the U.S. economy, after losing out to emerging markets where production costs are relatively low.

President Barack Obama on Friday launched an initiative to boost manufacturing jobs by teaming government up with companies and universities to invest more than $500 million in advanced technologies.

The economy grew at an annual rate of 1.9 percent in the first quarter, the department said in another report, up from a previously estimated 1.8 percent. That marks a sharp slowdown from the 3.1 percent rate in the fourth quarter.

The slowdown at the start of the year has lingered into the second quarter. The Federal Reserve on Wednesday cut its forecasts for U.S. economy growth for both this year and next, while stating hope some temporary restraints would soon lift.

Further clues on the health of the manufacturing sector will come next week in a series of regional surveys capped by data on Friday on national manufacturing from the Institute for Supply Management.

The weak surveys from the New York and Philadelphia Federal Reserve banks have raised the risk the ISM's index of national factory activity could contract in June after 22 months of expansion. Economists, however, are looking for a slowing in activity, not a decline.

TRANSPORTATION ORDERS UP

Durable goods orders in May were a buoyed by 5.8 percent bounce back in transportation equipment, with motor vehicle orders rising 0.6 percent after plunging 5.3 percent the previous month.

That suggested some improvement in auto production, which has been hit by a shortage of parts from Japan.

Excluding transportation, durable goods orders increased 0.6 percent after a 0.4 percent fall in April.

Outside of transportation, orders for machinery, primary metals, capital goods, electrical equipment and appliances, and computers and electronic products all rose.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rebounded to increase 1.6 percent last month after a 0.8 percent fall in April. Economists had expected a 1.0 percent increase.

Business continues to spend on new equipment, the only mystery is why they are not adding to staff to run the machines they are buying, said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi UFJ in New York.

Shipments of non-defense capital goods orders excluding aircraft, which go into the calculation of GDP product, increased 1.4 percent after falling 1.5 percent in April.

(Editing by Neil Stempleman)

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