U.S. factory index posts first rise since mid-2007

WASHINGTON (Reuters) - The outlook for the hard-hit U.S. factory sector improved for the first time in two years last quarter, although output is likely to shrink further in coming months, a manufacturing group said on Thursday.

The Manufacturers Alliance/MAPI said its quarterly composite index of future factory activity rose to 24 in June from an all-time low of 21 in March.

It was the first increase since June 2007 in the index, which is based on a survey of 63 senior financial executives.

While the gain suggests the sector's contraction is set to slow, the low level of the index -- the second-lowest in the series' history -- suggests a continued contraction in factory output over the next three to six months.

"The small rise in the composite index and the improvement in a few of the individual indexes indicate that the manufacturing sector is no longer in a freefall," MAPI economist Donald Norman said in a statement.

However, the picture is far from pretty. Seven of the 12 individual sub-indexes hit record lows. The order backlogs index dropped to a fresh low of 9 from 15, while an index gauging future research and development spending rolled down to 38 from 41.

In a bright spot, the data showed manufacturers have sharply pared inventories, bringing them into better balance with customer demand.

The new investment index held steady, while new orders bumped up to 6 from 4.

The survey's findings are in keeping with other gauges of the manufacturing sector's health. The closely watched index of national factory activity from the Institute for Supply Management edged up to 44.8 in June from 42.8 in May, showing a decreased rate of contraction. Any reading below 50 shows activity is shrinking.

(Reporting by Wendell Marsh, Editing by Chizu Nomiyama)