WRAPUP 2-U.S. manufacturing activity contracts in May to 4-year low

Mon Jun 3, 2013 1:07pm EDT

* ISM factory activity index falls to 49.0 in May

* Construction spending rises 0.4 pct in April

* Auto sales on track to rise 6 pct in May from last year

By Leah Schnurr

NEW YORK, June 3 (Reuters) - The U.S. 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. In addition, U.S. auto sales for May were on track to gain in line with forecasts. Monthly auto sales provide an early snapshot of U.S. consumer spending.

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, when the economy was coming out of recession.

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 Fed's chairman, Ben Bernanke, rattled financial markets last month when he said the Fed could cut back its purchases as soon as at one of its next few meetings.

The contractionary ISM report for May reduces what was already a small risk that the Fed could begin tapering its purchases when it meets later this month, Amna Asaf, an economist at Capital Economics, wrote on Monday. But it doesn't change the outlook for the economy to pick up later in the year, said Asaf, who expects the Fed to begin tapering "well before year-end."

A top Fed official, John Williams, head of the San Francisco Fed, on Monday reiterated his view that an improving economy would allow the central bank to pare back its bond buying in the summer. The Fed will hold its next policy meeting on June 18-19.

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 at midday after a volatile morning, while Treasuries prices rose after the weaker-than-expected data and the dollar fell across the board.

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 the U.S. auto market, the improving housing market helped spur sales of pickup trucks, which drove a rise in auto sales in May after a disappointing April. Total U.S. auto sales for the month were on track to meet analyst expectations of a 6 percent rise from last year, to about 15.1 million vehicles on a seasonally adjusted annualized rate.

Sales of Ford Motor Co's F-Series pickup truck, the best-selling vehicle in North America since the 1970s, soared 31 percent for its best May performance since 2005.