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)
