Manufacturing sector grows faster in September (Reuters)

WASHINGTON (Reuters) – Factories grew more quickly in September as production and hiring increased, suggesting that manufacturing would help keep the economy from slipping into a new recession.

Other data on Monday offered more good news for the troubled U.S. economy, with strong demand for new motor vehicles putting sales on track to surpass August's rate, and construction spending unexpectedly rebounding in August.

"That hardly sounds like an economy flat on its back. The economy is still moving forward. But no one should confuse direction with speed," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

September marked the 26th straight month of expansion in a sector that has shouldered the broader economic recovery, and the factory report implied that an outright contraction in output would probably be avoided.

The Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, boosted by a rebound in production and increased factory hiring. But new orders fell for third month.

Economists had expected the index to edge down to 50.5. A reading above 50 indicates expansion in manufacturing.

The data was eclipsed in financial markets by Greece's admission that it would miss its deficit target this year, which weighed on stocks worldwide. Prices of U.S. Treasury debt rallied, while the dollar rose against a basket of currencies.

Europe's worsening debt crisis has left the U.S. economy on the edge of a new downturn. The economy grew at a 1.3 percent annualized rate in the second quarter, an improvement from the 0.4 percent in the January-March period.

The growth in U.S. manufacturing is bucking a global trend. Factory activity in Europe and Asia slumped in September to levels not seen since the depths of the financial crisis as export demand dropped.

The Global Manufacturing PMI, compiled by JPMorgan with research and supply organizations, contracted for the first time in over two years.

VEHICLE SALES, CONSTRUCTION SPENDING STRONG

The Federal Reserve last month announced a new measure designed to push long-term borrowing costs lower by shifting assets on its balance sheet to help the tentative economy.

Last week, Fed Chairman Ben Bernanke said the U.S. central bank might need to ease monetary policy further if inflation or inflation expectations fell significantly.

For now, indications are that the economy will avoid a recession and remain on a slow growth track, even as weak incomes constrain consumer spending -- the main engine of growth.

But households were more willing to spend on motor vehicles last month. Reports so far from General Motors, Chrysler and Volkswagen suggest sales could be about 8 percent higher than August's on a seasonally adjusted annualized basis.

A separate report from the Commerce Department showed an unexpected rebounded in construction spending in August as outlays on state and local government building projects rose sharply.

Construction spending rose 1.4 percent to an annual rate of $799.15 billion, the Commerce Department said. Economists had forecast a 0.3 percent drop.

"Spending should rise in the third quarter as a result of post-(Hurricane) Irene repairs. Construction is set to add to GDP growth in third and fourth quarter but the sector is still very weak," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Spending on non-residential structures rose in the second quarter at its quickest pace since the third quarter of 2007.

Data last week showed that cash-rich U.S. businesses continued to invest in machinery, a trend that economists expect to hold and keep the economy expanding.

Manufacturing accounts for about 12 percent of gross domestic product and almost 11 percent of nonfarm employment.

The tenor of the ISM manufacturing report was strengthened by an increase in hiring last month, which could be a good omen for Friday's employment report.

The economy failed to add jobs in August, leaving the unemployment rate at a lofty 9.1 percent.

Other details of the factories survey showed production rebounded last month after contracting in August. However, new orders contracted for a third straight month, potentially pointing to a pullback in manufacturing in the months ahead.

"The main concern going forward would be if new orders didn't pick up," said Bradley J. Holcomb, chair of the ISM manufacturing business survey committee in Dallas, Texas.

But inventories are growing at a slower pace and the ISM viewed customers' supplies as too low, which should boost future orders. In addition, orders for exports rose and suppliers are taking a little bit longer to make deliveries to manufacturers, which is also a good sign.

(Additional reporting by David Lawder in Washington, Ellen Freilich in New York and Bernie Woodall in Detroit; Editing by Dan Grebler)

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Manufacturing rises but consumers remain wary (Reuters)

NEW YORK (Reuters) – The pace of growth in manufacturing picked up for the first time in four months in June, surprising investors and fueling optimism the recent economic slowdown will be temporary.

A separate survey showed that although lower gasoline prices helped temper the gloomy mood among consumers last month, their expectations for the economy remained bleak.

The manufacturing report eased fears that the economic recovery could remain sluggish, though some economists cautioned it was too soon to tell if economic growth had turned a corner.

Many economists and the Federal Reserve, which ended its latest round of monetary stimulus on Thursday as the second quarter ended, have maintained the obstacles to growth in the first six months of the year were temporary.

The Institute for Supply Management said its index of national factory activity rose to 55.3 from 53.5 the month before, when it had slumped to its lowest level since September 2009. The reading topped expectations for 51.8, according to a Reuters poll of economists.

A reading above 50 indicates expansion in the manufacturing sector, while a number below 50 means contraction.

"It indicates perhaps the biggest weakness will be in May," said Michael Gapen, chief U.S. economist at Barclays Capital in New York. "It sets the groundwork for acceleration in growth for the second half of the year."

U.S. stocks added to gains immediately following the data, while Treasury prices turned negative and the dollar extended gains against the yen.

Stocks were poised to record their best week in nearly a year as the manufacturing report and other data in recent days helped to dispel the gloom about the economy.

One of the biggest factors behind the increase in the pace of growth was a jump in inventory building by manufacturers, which some economists said could be a sign of confidence that the U.S. economic recovery would speed up later this year.

The employment gauge also rose, but new orders increased only slightly, and exports fell. Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the details of the report were "baffling."

The areas of strength in the ISM report seemed at odds with the drop in new orders in recent months, which could lead to a fall in the main index next month, Shepherdson wrote in a note.

The prices paid index fell to its lowest since August 2010, further easing concerns about inflation.

Although employment prospects looked a bit brighter, the closely watched U.S. payrolls report for June is not expected to show a big pickup in jobs growth. It is due to be released on July 8.

Separate data on the consumer was less encouraging as sentiment worsened in June. Falling gasoline prices stabilized consumers' view of their current economic conditions, but longer-term expectations remained subdued, the Thomson Reuters/University of Michigan survey showed.

While small spending gains can be expected in the second half of the year, the trend is more likely to vary between lackluster and zero than lackluster and robust over the next several years, the survey said.

The final reading for the consumer sentiment index came in at 71.5, down from 74.3 the month before. It was a hair below the preliminary June figure of 71.8 and shy of the median forecast for 71.9.

The survey's barometer of current economic conditions edged up to 82.0 from 81.9 in May. The gauge of consumer expectations fell to 64.8 from 69.5 and below forecasts for 66.6.

Consumers' one-year inflation outlook fell to 3.8 percent from 4.1 percent. But the five-to-10-year inflation outlook inched up to 3.0 percent from 2.9 percent.

A separate measure of future U.S. economic growth fell to a 29-week low in the latest week, according to the Economic Cycle Research Institute, a New York-based independent forecasting group.

The Weekly Leading Index fell to 126.4 in the week ended June 24 from 127.0 the previous week and its lowest point since December 3, 2010.

The index's annualized growth rate also dropped, to 2 percent from 2.9 percent a week earlier, reaching its lowest point since December 17, 2010.

(Additional reporting by Alexandra Alper; Editing by Padraic Cassidy)

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