By Lucia Mutikani

WASHINGTON (Reuters) - New orders for key U.S.-made capital goods fell in March, weighed down by the biggest decline in demand for machinery in nearly two years, and a drop in shipments cemented expectations that business spending on equipment slowed in the first quarter.

But other data on Thursday showed the economy remains on a strong footing. The number of Americans filing for unemployment benefits fell to the lowest level in more than 48 years last week and the goods trade deficit narrowed sharply in March amid strong export growth.

"The U.S. economy is still moving higher," said Chris Rupkey, chief economist at MUFG in New York. "The pullback in goods orders from companies is not a red flag for the economic outlook yet even if the caution light should be left on."

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, slipped 0.1 percent last month. Data for February was revised to show these so-called core capital goods increasing 0.9 percent instead of the previously reported 1.4 percent jump.

Economists polled by Reuters had forecast core capital goods orders rising 0.5 percent last month. Core capital goods orders increased 6.5 percent on a year-on-year basis.

Last month, orders for machinery fell 1.7 percent, the biggest decline since April 2016, after a gain of 0.3 percent in February. There were, however, increases in orders of primary metals, computers and electronic products, fabricated metals and electrical equipment, appliances and components.

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, increased 2.6 percent in March as demand for transportation equipment rose 7.6 percent. That followed a 3.5 percent surge in durable goods orders in February.

Shipments of core capital goods declined 0.7 percent last month after a downwardly revised 1.0 percent increase in February. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.

They were previously reported to have vaulted 1.4 percent in February. Business spending on equipment likely cooled in the first quarter after double-digit growth in the second half of 2017. The moderation in equipment investment is expected to have combined with a sharp slowdown in consumer spending to restrain economic growth in the first quarter.

U.S. Treasury yields held at lower levels after the data. The dollar <.DXY> rose against a basket of currencies. Stocks on Wall Street were trading higher as strong earnings from Facebook <FB.O> and a handful of chipmakers powered technology shares.

According to a Reuters survey of economists, GDP growth likely slowed to a 2.0 percent annualized rate in the first three months of the year. The economy grew at a 2.9 percent pace in the fourth quarter. The government will publish its advance estimate of first-quarter GDP on Friday.

FISCAL STIMULUS

The anticipated slowdown in economic growth is likely to be temporary against the backdrop of a robust labor market that is expected to underpin consumer spending. The economy is also expected to get a boost from the Trump administration's $1.5 trillion income tax cut package as well as increased government spending, which should also support business investment.

"We still expect investment growth to pick up over the rest of the year, as tax cuts boost domestic demand and capacity constrains bite," said Michael Pearce, a senior U.S. economist at Capital Economics in New York.

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits dropped 24,000 to a seasonally adjusted 209,000 for the week ended April 21, the lowest level since December 1969. Economists polled by Reuters had forecast claims falling to 230,000 in the latest week.

The labor market is considered to be near or at full employment. The unemployment rate is at a 17-year low of 4.1 percent, not far from the Federal Reserve's forecast of 3.8 percent by the end of this year.

"The tight labor market keeps getting tighter," said John Ryding, chief economist at RDQ Economics in New York. "Companies are extremely reluctant to release labor, presumably because of the difficulty in replacing workers."

A third report from the Commerce Department showed the goods trade deficit fell 10.3 percent to $68.0 billion in March. Exports rose $3.4 billion to $140.1 billion last month, reflecting a strengthening global economy and weak U.S. dollar. Imports fell $4.4 billion to $208.1 billion in March.

The department also reported that wholesale inventories rose 0.5 percent last month. Retail inventories, however, fell 0.4 percent. The goods trade deficit and inventory data had a marginal impact on first-quarter GDP estimates.

(Reporting by Lucia Mutikani; Editing by Paul Simao)