* ISM factory index falls 1.5 points to 59.8 in September
* ISM new orders index drops; employment rises
* Construction spending rises 0.1 percent in August
WASHINGTON, Oct 1 (Reuters) - U.S. manufacturing activity slowed in September as growth in new orders moderated sharply, but factories hired more workers, pointing to sustained strength in the sector.
The Institute for Supply Management (ISM) said its index of national factory activity dropped 1.5 points to a reading of 59.8 last month from 61.3 in August, which was the highest since May 2004. A reading above 50 indicates growth in manufacturing, which accounts for about 12 percent of the U.S. economy.
The ISM continued to describe demand as remaining "robust." The ISM also noted that "the nation's employment resource and supply chains continued to struggle, but to a lesser degree." It said factories continued to be "overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations."
President Donald Trump's "America First" trade policy have left the United States embroiled in a bitter trade war with China and tit-for-tat import tariffs with other trading partners, including the European Union, Canada and Mexico.
Washington last week slapped tariffs on $200 billion worth of Chinese goods, with Beijing retaliating with duties on $60 billion worth of U.S. products. The U.S. and China had already imposed tariffs on $50 billion worth of each other's goods.
While data have suggested little impact on the economy so far from the tariffs, analysts warn that the import duties could disrupt supply chains, undercut business investment and slow the economy's momentum. The economy grew at a 4.2 percent annualized rate in the second quarter, almost double the 2.2 percent in the January-March period.
The ISM's new orders sub-index fell to a reading of 61.8 last month from 65.1 in August. A measure of export orders, however, rose last month. The survey's employment measure rose to 58.8, the highest reading since February from 58.5 in August.
U.S. financial markets were little moved by the data.
A second report from the Commerce Department showed construction spending edged up 0.1 percent in August. Data for July was revised up to show construction outlays rising 0.2 percent instead of the previously reported 0.1 percent gain.
Economists polled by Reuters had forecast construction spending increasing 0.4 percent in August. Construction spending rose 6.5 percent on a year-on-year basis.
Spending on public construction projects jumped 2.0 percent in August to the highest level since July 2009. That followed a 1.7 percent increase in July. Spending on federal government construction projects soared 5.9 percent to a 10-month high after increasing 2.3 percent in July.
State and local government construction outlays accelerated 1.7 percent in August to the highest level since March 2009. That followed a 1.6 percent rise in July.
But spending on private construction projects fell 0.5 percent in August after decreasing 0.2 percent in July. Private construction outlays have now declined for three straight months. Investment in private residential projects fell 0.7 percent in August after gaining 0.2 percent in July.
Homebuilding has been constrained by rising material costs as well as persistent land and labor shortages. Residential investment contracted in the first half of the year and is expected to have declined further in the third quarter.
Spending on private nonresidential structures, which includes manufacturing and power plants, slipped 0.2 percent in August after declining 0.8 percent in July. (Reporting By Lucia Mutikani; Editing by Andrea Ricci)