Manufacturing activity contracts in May to four-year low

NEW YORK Mon Jun 3, 2013 1:13pm EDT

A view of employees working at the General Motors assembly plant in Wentzville, Missouri February 7, 2012. REUTERS/Sarah Conard

A view of employees working at the General Motors assembly plant in Wentzville, Missouri February 7, 2012.

Credit: Reuters/Sarah Conard

NEW YORK (Reuters) - The manufacturing sector contracted in May, driving activity to the lowest level in nearly four years, in the latest sign the economy is encountering a soft patch.

Still, growth is not expected to pull back sharply, and separate data on Monday showed construction spending rose slightly in April, though it trailed expectations. The Institute for Supply Management (ISM) said its index of national factory activity in May fell to 49.0 from 50.7 in April, short of expectations for 50.7. It was the lowest level since June 2009.

A reading below 50 indicates contraction in the manufacturing sector. The last time the ISM manufacturing index fell below 50 was in November, shortly after the U.S. East Coast was hit by a massive storm.

Last month's regional manufacturing snapshots were mixed, with activity in New York State and the mid-Atlantic region contracting, but Chicago rebounding.

Nationwide, economic growth in the second quarter is expected to slow from the 2.4 percent rate posted in the first three months of the year, partly due to tighter fiscal policy in Washington. Even so, the recovery is expected to regain traction in the second half of the year.

"There's nothing here that indicates a recession, just that things are going to be perhaps a little bit softer," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

"The key question, particularly for the Fed, is what does the data imply for the future?" Brown said. "Are things going to be strong enough that they're going to pick up in the second half? That expectation is still there but it's probably on shaky footing."

The Federal Reserve is currently buying $85 billion a month in bonds as part of its efforts to boost the economy. Investor attention has turned to when the U.S. central bank may slow or stop the bond buying program.

The ISM's gauge for new orders dropped to 48.8 from 52.3, while a measure of employment edged down to 50.1 from 50.2. Production fell to 48.6 from 53.5.

The exports index fell to 51.0 from 54.0, while imports held up relatively better, slipping slightly to 54.5 from 55.0.

U.S. stocks were mostly lower after a volatile morning, while Treasuries prices rose after the weaker-than-expected data and the dollar fell to its lowest level against the yen since early May.

A separate manufacturing report was somewhat at odds with the ISM data. Activity picked up slightly in May though the pace was still sluggish, according to financial data firm Markit, whose Manufacturing Purchasing Managers Index (PMI) rose to 52.3 in May from 52.1 in April.

The ISM data is more closely watched in financial markets than the PMI data, in part due to its long history.

Overseas, euro zone manufacturing contracted again last month, while Asian factories lost momentum.

Rounding out the economic data in the United States, construction spending rose 0.4 percent to an annual rate of $861 billion in April, the Commerce Department reported. The gain was smaller than the 0.8 percent increase forecast by analysts polled by Reuters.

The report suggested government belt-tightening was holding back growth. Public sector spending at construction sites fell 1.2 percent in April, hit by a sharp decline in state and local outlays, which hit a seven-year low.

Private residential construction spending eased 0.1 percent lower. Businesses, however, ramped up spending to build utilities, and overall private nonresidential construction spending rose 2.2 percent.

In a positive sign of strong consumer demand, Chrysler Group LLC reported an 11 percent rise in May U.S. auto sales, easily beating analysts' expectations. Major automakers will report sales throughout the day.

(Additional reporting by Jason Lange in Washington; Editing by Leslie Adler)

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