Strong factory orders, auto sales brighten U.S. economic picture

(Adds final auto sales figure, analyst comment; updates markets)

* Factory orders increase a record 10.5 percent in July

* Orders excluding transportation fall 0.8 percent

* Auto sales accelerate sharply in August

By Lucia Mutikani

WASHINGTON, Sept 3 (Reuters) - New orders for U.S. factory goods posted a record gain in July and auto sales last month accelerated to their highest level in 8-1/2 years, offering further bullish signals for the economy.

Another report on Wednesday from the Federal Reserve showed manufacturing expanding across a broad base of sectors and auto sales hitting "high levels" in recent weeks.

"U.S. economic activity continues to improve," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

The Commerce Department said new orders for manufactured goods jumped 10.5 percent in July on robust demand for aircraft and autos, compared to a 1.5 percent rise in June.

Orders excluding the volatile transportation category slipped 0.8 percent in July, but that drop followed a 1.4 percent increase the prior month, leaving intact the upbeat trend for manufacturing activity.

Separately, industry research firm Autodata Corp said auto sales rose to a seasonally adjusted annual rate of 17.53 million units in August, the highest level since January 2006 and above Wall Street's expectations of a 16.6 million-unit pace.

Ford Motor Co (NYSE: F - news) saw a 0.4 percent increase in sales, while Chrysler Group - a unit of Fiat SpA - reported a 20 percent surge. General Motors Co, however, said its sales declined 1.2 percent.

Manufacturing is accelerating, with the Institute for Supply Management reporting on Tuesday that its gauge of factory activity hit its highest level in nearly 3-1/2 years in August. In addition, a measure of new orders touched a 10-year high.

The factory and auto sales reports added to employment and housing data in painting an upbeat picture of the economy.

BUSINESS SPENDING RISING

Economists say the acceleration in factory activity suggested a pickup in business spending on capital goods and supported their forecasts for sturdy growth in the third quarter.

Growth estimates for the July-September period range as high as a 3.5 percent annual pace. The economy expanded at a 4.2 percent rate in the second quarter.

Separately, the Fed's Beige Book found economic activity continued to expand in recent weeks. It said manufacturing was growing broadly, with auto production boosting demand for steel and other related products.

"It reinforces the current narrative of improving domestic economic fundamentals," said Millan Mulraine, deputy chief economist at TD Securities in New York.

U.S. financial markets were largely unmoved by the data as investors focused on the conflict in eastern Ukraine. U.S. stocks ended mixed, with Apple (NasdaqGS: AAPL - news) shares falling 4.22 percent as it grappled with a possible security breach of its iCloud service a week before the launch of its new iPhone.

Orders for transportation equipment soared a record 74.1 percent in July, reflecting outsized civilian aircraft orders received by Boeing (NYSE: BA - news) that was flagged in the durable goods orders report published last week.

Auto orders rose 7.3 percent, the largest increase since March 2011, and capital goods orders surged a record 52.5 percent. But orders for primary metals, machinery, computers and electrical equipment, appliances and components fell.

Unfilled orders at factories recorded their largest rise in 14 years, while inventories remained lean, both positive signs for the sector in the near term. (Reporting by Lucia Mutikani; Additional reporting by Bernie Woodall and Ben Klayman in Detroit and Michael Flaherty in Washington; Editing by Paul Simao)