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Factory sector grows,construction dampens

Posted on: Monday, 1 August 2005, 11:35 CDT

By Andrea Ricci

NEW YORK (Reuters) - The U.S. factory sector grew more than expected in July, heralding a strong start for the economy in the third quarter, according to a survey released on Monday, while June housing data presented a mixed picture.

The Institute for Supply Management's factory survey index rose to 56.6 in July from 53.8 in June. The median forecast of economists polled by Reuters put the index at 54.5. Strong growth in July was reported by industries dealing in such commodities as petroleum, textiles, food and wood.

"It's all systems go in manufacturing. We had that slump, and now it's back in the mid-50s, so this is a very strong report," said Kurt Karl, chief economist at Swiss Re in New York.

A reading above 50 signals expansion while a reading below indicates contraction.

Factory production slowed earlier in the year, raising concerns that the U.S. economy was entering a soft patch.

But economists noted that in the past couple of months, manufacturing indexes have indicated renewed strength, and most analysts now chalk up the earlier weakness to inventory adjustment after a build-up in stocks early in the year.

According to government growth data released Friday, companies drew down inventories at a $6.4 billion annual rate during the second quarter after boosting them by $58.2 billion in the first quarter.

"What is apparent is that the extra consumer demand that we saw through June is helping to clean up an inventory back-up and has paved the way for a production increase," said Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio, adding "And all this has occurred with less pressure on prices."

The prices paid index of the ISM report fell to 48.5 in July from 50.5 in June, marking the end of 40 consecutive months of higher prices.

The ISM's new orders index, a signal of future growth, rose to 60.6 from 57.2 in June.

"Apparently, there is a lot of momentum in the economy right now and it looks like the second half will be a little bit stronger than certainly I thought it would be," said Norbert Ore, chairman of the ISM's Business Survey Committee.

CONSTRUCTION SPENDING FALLS

U.S. construction spending fell 0.3 percent in June, the fourth consecutive monthly drop. Outlays fell to a seasonally adjusted annual rate of $1.093 trillion, government data showed.

Analysts were expecting a 0.5 percent gain in June

Construction spending has fallen 3.1 percent from the all-time high hit in February.

The drop in spending raised questions about whether the housing boom, which has helped sustain the U.S. economic expansion, has started to wane.

But some economists said they were loath to predict a slowing of the housing market based on the construction data.

Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, said construction spending has been distorted by the recent inclusion of home improvements, which is very volatile, as a component of the data.

He said that excluding home improvements, June spending was up a slight 0.1 percent. "But the trend is positive and rising construction employment means there is no reason to think any real softening is under way," he said in a note to clients.

Other housing data were encouraging. Pending sales of previously owned homes rose in June, indicating that home sales in July and August may edge higher.

U.S. bond prices extended losses on Monday following the data, as the report of a healthy manufacturing sector indicated the Federal Reserve would continue to raise interest rates. The dollar slipped despite the strong data.

ClearView Economics' Mayland said the Fed was likely to focus on gains in factory production, rather than on the signs of softer prices.

"The bottom line is that they will increase rates in August, September and probably in November, which gets us to four percent," he said. The Fed's benchmark federal funds rate currently is 3.25 percent. (Additional reporting by Chris Reese in New York and Tim Ahmann and Kristin Roberts in Washington)

Source: REUTERS

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