INSTANT VIEW: U.S. factory contraction slows in May

NEW YORK (Reuters) - The U.S. manufacturing sector contracted in May, but at a slower rate, signaling the sector is gaining footing and should help the economy move toward an upturn this year, an industry report released on Monday showed.

U.S. construction spending unexpectedly posted its biggest increase in eight months in April, advancing for a second straight month as the private sector put money into both residential and nonresidential projects, according to a government report on Monday.

KEY POINTS

ISM MANUFACTURING: * The Institute for Supply Management said its index of national factory activity rose to 42.8 from 40.1 in April. * This compares with economists' median forecast of 42.0. * A reading below 50 indicates contraction in the manufacturing sector. * ISM said the index has been below this threshold for 16 straight months.

CONSTRUCTION SPENDING: * The Commerce Department said spending on construction projects rose 0.8 percent in April from March, the biggest increase since August. * Spending climbed a revised 0.4 percent in March, previously reported as a 0.3 percent rise. * Analysts polled by Reuters were expecting a 1.3 percent decline in overall construction spending in April.

COMMENTS:

PATRICK NEWPORT, ECONOMIST, IHS GLOBAL INSIGHT, LEXINGTON,

MASSACHUSETTS:

"I think that we'll probably see industrial production growing in the third quarter, so I think that the outlook is that things are going to take off."

JACK ABLIN, CHIEF INVESTMENT OFFICER, HARRIS PRIVATE BANK,

CHICAGO:

"I guess it was better than the previous month and slightly better than expected but keep in mind it's situated pretty far below fifty so we have to temper our enthusiasm.

"I don't think I would call it a table pounding reason to jump in with both feet but certainly considering the economic backdrop I would consider it as good news."

SHAUN OSBORNE, CHIEF CURRENCY STRATEGIST, TD SECURITIES,

TORONTO:

"The ISM suggests that the U.S. economy is stabilizing, if not outright improving and the market is all about risk appetite coming back. Generally, this is still a case of better-than-expected data not necessarily good for the U.S. dollar. We expect no rebound in sight for the dollar just yet."

MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, BANK OF NEW

YORK-MELLON:

"It was better than expected. It shows contraction but at a slower pace. Prices paid were higher as one would expect as commodity prices rebounded in May. Severe recessionary conditions appear to have subsided in the second quarter, though we still have a recession in manufacturing. The dollar is getting hit but it's not being driven by fundamentals now. The shift in market sentiment is driving a movement out of dollar-denominated deposits because investors can't afford not to participate in this equity rally. Even if they don't believe in it, they can't afford to be left out."

KEVIN FLANAGAN, FIXED INCOME STRATEGIST, GLOBAL WEALTH

MANAGEMENT, MORGAN STANLEY, PURCHASE, NEW YORK:

"Considering you continue to hear concerns about inflation rearing its ugly head somewhere down the road, the prices paid component could certainly pique some interest.

"In Treasuries, with a number like this and with stocks up, you will see some selling take hold."

MICHAEL DARDA, CHIEF ECONOMIST, MKM PARTNERS LLC, GREENWICH,

CONNECTICUT:

"It was better than expected, and I would put particular emphasis on the new orders component, which broke above 50. In my view, this is more evidence that we're getting closer to the end of the recession.

"The data is more forward looking than what we had earlier, the data on personal income and spending, so it is much more relevant. This is one of the first reads we've had on the second quarter, so I think it will dominate trading today."

MARKET REACTION: STOCKS: U.S. stock indexes extend gains after rise in April construction spending, May ISM manufacturing index. BONDS: U.S. Treasury debt prices extend losses. DOLLAR: U.S. dollar extends losses versus euro.

DATA RELEASED EARLIER JUNE 1:

U.S. consumer spending eases 0.1 pct in April