Factory growth quickens in October

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) - Surprisingly strong growth last month in the U.S. manufacturing sector was good news for a sluggish economy but was probably too little, too late to stop the Federal Reserve from more monetary easing.

The quicker pace of factory growth was also tempered by a separate report showing U.S. personal income fell in September while consumer spending remained tepid.

The data was among the last before central bank officials gather Tuesday and Wednesday to assess the economy and its uneven recovery from the worst downturn in 80 years.

The Fed is expected to inject more money into the economy through bond purchases, and that view was bolstered by the consumer data, which showed no inflation pressure in the economy.

All of that overshadowed news that the Institute for Supply Management's index of national factory activity rose to 56.9 in October from 54.4, with the employment, new orders and prices paid components of the index also rising.

"The focus will be on the elections and the Fed this week, so the impact from this won't be as strong as it would have been otherwise," said David Kupersmith, head trader at Third Wave Global Investors in Greenwich, Connecticut.

"But the ISM is one of the most important pieces of data out there and the Fed will be looking at it as it prepares its comments," he added.

U.S. stocks rose, boosted partly by strong U.S. and Chinese factory data, while the dollar rose and U.S. Treasury prices turned negative.

Alan Ruskin, global head of G10 currency strategy at Deutsche Bank, said the Fed won't be able to change course easing based on one strong ISM report.

But he said it would provide fuel for Fed hawks who are dubious about more easing and "will tend to add to expectations that the Fed will want maximum flexibility to turn off the printing press" should strong economic data warrant it.

Separate data Monday showed U.S. construction spending rose unexpectedly in September, driven by a one-year high in investment in public projects.

GROWTH STILL SLUGGISH

Beyond manufacturing, though, the economy still looks less than robust. The Commerce Department on Monday said consumer spending rose 0.2 percent in September after advancing 0.5 percent in August. It was held back by a surprise 0.1 percent decline in income, the first slide since July 2009. Economists had expected a 0.2 percent gain.

While the data was included in Friday's advance third-quarter gross domestic product report, analysts said it underscored the loss in momentum as the quarter ended.

What's more, the Fed's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy - was flat in September for the first time since April. The index rose 0.1 percent in August.

"The Fed's focus on inflation and quantitative easing was reflected by today's PCE deflator number, which continues to head down to historical lows," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

The economy grew at a sluggish 2 percent annual pace in the third quarter after expanding 1.7 percent in the prior period, driven by a large accumulation in business inventories and an acceleration in consumer spending.

The central bank, which cut overnight interest rates to near zero in December 2008, has already bought about $1.7 trillion worth of Treasury and mortgage-related debt.

(Reporting by Steven C. Johnson and Lucia Mutikani; editing by Neil Stempleman)