U.S. retail sales grew more than expected last month as vehicle purchases bounced back, but non-auto sales rose modestly, suggesting consumers remained too cautious to drive a robust economic recovery.

Other data on Monday showed New York state manufacturing activity slowed in November for the first time in four months, further highlighting the uneven nature of economic healing after the worst recession since the 1930s.

I think we are moving in the right direction, but it's not a straight line higher, said Sean Simko, fixed-income portfolio manager at SEI in Oaks, Pennsylvania.

The Commerce Department said total retail sales increased 1.4 percent last month after dropping 2.3 percent in September, beating market expectations for a 1 percent rise. Excluding autos, sales were up just 0.2 percent following a 0.4 percent rise the prior month.

It was the first time in more than a year sales outside autos rose for a third straight month.

For retail sales graphic see http://graphics.thomsonreuters.com/119/US_RTLSLS1109.gif

U.S. stocks rallied to 13-1/2 month highs on the retail data, which analysts said was a welcome sign heading into the holiday season. Consumer spending normally accounts for about 70 percent of U.S. economic activity.

The Standard & Poor's 500 Index <.SPX> closed above the psychologically important 1,100 level for the first time since October 2008. <.N>

Stocks briefly trimmed gains after Federal Reserve Chairman Ben Bernanke said the U.S. central bank was watching the U.S. dollar's depreciation as part of its commitment to price stability. The weak dollar has boosted commodity prices.

GROWTH FORECASTS TO BE PARED BACK

Despite the strong headline retail sales reading last month, analysts were concerned with the sharp downward revision to September's figure, which was previously reported as a 1.5 percent drop.

They said the revision indicated the government would have to adjust downwards its third quarter growth estimates.

The economy expanded at a 3.5 percent pace in the July-September period, after four straight quarters of decline, driven mostly by government stimulus.

That adds quite to a long list of revisions. If you add everything in right now we are estimating that GDP will get revised down to 2.6 percent, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington Massachusetts.

The government publishes its second GDP estimate next week. There are worries that as government stimulus fades, rising unemployment will continue to weigh on consumer spending and hold back the recovery.

But Bernanke, speaking in New York, said he believed the recent pickup in economic activity was a reflection of more than purely temporary factors and continued growth next year is likely.

The New York Federal Reserve Bank's gauge of New York State manufacturing activity slowed to 23.51 in November from 34.57 in October. Activity was pulled down by a fall in new orders, while the employment measure dropped sharply.

For manufacturing graphic see http://graphics.thomsonreuters.com/119/US_MFGISM1109.gif

Retail sales in October were lifted by a jump in new vehicle and parts receipts, which surged 7.4 percent.

Auto sales had slumped 14.3 percent the previous month following the expiration of the government's popular cash-for-clunkers incentive program in August that had buoyed demand for motor vehicles. Previously, the government had reported auto sales falling 10.4 percent in September.

Even without the boost from auto sales, there were signs consumer spending continued to slowly improve in October.

Core retail sales excluding autos, gasoline and building materials rose 0.5 percent, advancing for a fourth straight month. Analysts said this was evidence of a gradual improvement in consumer spending.

Dan Henry, the chief financial officer of American Express Co -- the largest U.S. credit card company by purchases volume -- told a Reuters Global Financial Summit spending would improve in the fourth quarter compared with the third quarter.

But analysts still reckon high unemployment, coupled with low income growth and tight credit, will hamper growth.

The failure of households to join the party will be the main reason why the overall economic recovery disappoints, said Paul Dales, an economist at Capital Economics in Toronto.

A second report from the Commerce Department showed business inventories fell 0.4 percent to $1.30 billion in September, the lowest level since November 2005. Markets had expected a 0.7 percent fall after August's 1.6 percent drop.

A moderation in the pace of inventory liquidation contributed almost 1 percentage point to the brisk growth rate in the third quarter. Analysts are hoping that a further slowdown as companies rebuild depleted stocks will support economic growth in the coming quarters.

(Additional reporting by Richard Leong and John Parry in New York: Editing by Andrew Hay)

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