A gauge of manufacturing in New York State showed the sector unexpectedly contracted for the second month in a row as new orders worsened, the New York Federal Reserve said in a report on Friday.

The pace of decline did moderate somewhat in July from the month before, with the New York Fed's Empire State general business conditions index rising to minus 3.76 from minus 7.79 in June. However, it was still weaker than expectations for a rise to 4.50, according to a Reuters poll, and missed even the lowest end of the range of forecasts of minus 2.0.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. In June the regional index had tumbled sharply, contracting for the first time since November 2010, but the larger national report for the month showed a modest uptick in the pace of growth.

The continued weakness of the Empire State index raises some doubts over to what extent the manufacturing sector is recovering from the recent soft spot, said David Sloan, economist at IFR Economics, a unit of Thomson Reuters.

New orders fell to minus 5.45 from minus 3.61, while shipments improved to positive 2.22 from minus 8.02.

Separate data released at the same time showed consumer prices fell slightly more than expected in June, posting their biggest drop in a year. U.S. stock index futures pared gains immediately following the reports.

Employment gauges worsened with the index for the number of employees at its lowest level since December 2010, falling to 1.11 from 10.20, and the average employee workweek index tumbling to minus 15.56 from minus 2.04.

The outlook for the months to come was less gloomy with the index of business conditions six months ahead rising to 32.22 from 22.45. However, the level of optimism was well below levels seen earlier this year, the report said.

(Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

Manufacturing