Manufacturing slows in July for 3rd month

A worker tends yarn-spinning equipment at a Parkdale Mills plant in Walnut Cove, North Carolina, in this photo taken June 15, 2010.

NEW YORK (Reuters) - U.S. manufacturing grew in July at its slowest pace this year as a stream of new orders tapered off, pointing to further slackening in the economic recovery.

Still, the manufacturing index was better than many analysts had expected and boosted U.S. stock prices.

Manufacturing has been leading the U.S. recovery, which started in the second half of 2009. Even though recent data has suggested slowing growth, most economists see low probability of another severe downturn in the near future.

Other data showed manufacturing picked up in the euro zone in July, while it shrank in China for the first time since March 2009.

The Institute for Supply Management said on Monday its index of national factory activity fell to 55.5 in July from 56.2 in June, the third consecutive monthly decline. An updated median forecast by 74 economists surveyed by Reuters was for a reading of 54.2.

A reading above 50 reflects expansion. However, July's measure was the lowest reading since December.

Also, the new orders index dropped to 53.5 in July from 58.5 in June, to its lowest level since June 2009.

"Even though the decline in the headline number is smaller than expected, the composition shows weakness, particularly in new orders, which is bad news," said Pierre Ellis, senior economist at Decision Economics in New York.

U.S. stocks .SPX closed at their highest level in 10 weeks, helped in part by the data. The dollar .DXY fell to a three-month low against a basket of currencies on concerns the U.S. recovery is faltering. U.S. Treasury debt prices were lower.

On Friday, data showed U.S. economic growth slowed in the second quarter and consumer sentiment in July hit its lowest since November.

Comments by Federal Reserve Chairman Ben Bernanke on Monday reinforced those concerns. He said the economy, though improving, is still short of full recovery.

An employment component in Monday's ISM report rose, however, providing a positive sign ahead of Friday's monthly jobs report from the U.S. government. Job growth has been the biggest hurdle to advances by the U.S. economy.

Friday's Labor Department report is expected to show a decline of 65,000 in overall U.S. non-farm payrolls, but gains in private payrolls, according to a Reuters poll. Unemployment is seen at 9.6 percent compared with 9.5 percent in the June report.

Another report on Monday showed U.S. construction spending unexpectedly rose 0.1 percent in June as increased investment in public projects offset the 15th straight monthly decline in private nonresidential construction.

In contrast to Monday's ISM report, data on Friday showed manufacturing activity in the nation's Midwest region accelerated in July as orders rebounded strongly.

"We look for growth in the manufacturing sector to track the broader economy more closely (rather than outpace it)," analysts at RBS said in a note. "However, readings in the low to mid-50s remain far from levels that would suggest the economy is at risk of a double dip."

Because of concerns about the economic outlook, many strategists see the Federal Reserve keeping overnight interest rates near zero until the second half of next year. The U.S. central bank has said it stands ready to ease monetary policy further if the recovery withers.

The Fed meets next Tuesday and is scheduled to release its statement on the economy and interest rates.

For a graphic on U.S., Chinese and euro zone manufacturing, please see:

link.reuters.com/jud82n

(Additional reporting by Ellen Freilich and Lucia Mutikani; Editing by Dan Grebler and Andrew Hay)