U.S. manufacturing shrinks at slower pace in May

By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. manufacturing sector showed improvement in May, contracting at a slower rate for the fifth straight month, while consumer spending slipped only slightly in April, according to reports Monday that offered more proof the deep recession is losing its bite.

The data drove U.S. stocks up more than 2.5 percent.

The Institute for Supply Management's closely monitored index of national factory activity rose to 42.8 last month from 40.1 in April. It was the highest reading since September; a reading under 50 indicates contraction.

Separately, the Commerce Department said consumer spending slipped 0.1 percent in April, less than market expectations, after a 0.3 percent fall in March. Spending on construction projects rose 0.8 percent in April from March, the biggest increase since August.

"The data provide a clear signal that the worst of the troubles in the economy appear to be behind us," said Joseph Brusuelas, an economist at Moody's Economy.com in Westchester, Pennsylvania.

"With the job market looking to have stabilized, all the necessary factors for a second-half recovery are beginning to fall in place."

Government bond prices sagged as the data cut safe-haven buying and briefly pushed the yield curve, the gap between two-year and 10-year Treasury notes, to match the previous record high of 275 basis points, from 254 basis points on Friday.

The sell-off was exacerbated by aggressive selling by mortgage players in response to a recent spike in home loan rates, which could hurt recovery prospects for an economy now in its 18th month in recession.

The improvement in U.S. manufacturing was mirrored by reports from the euro zone and the United Kingdom showing the pace of contraction in factory activity was losing momentum. In China, the manufacturing sector expanded for a third straight month in May.

But the hopeful economic outlook for the U.S. economy was dimmed somewhat by the bankruptcy of General Motors Corp GM.N, the biggest ever in U.S. manufacturing.

U-SHAPED RECOVERY

"I would think that the bankruptcy and restructuring in the auto industry would tend to slow the rate of recovery right now," said Norbert Ore, chairman of the ISM manufacturing Business Survey Committee in Atlanta.

While the rise in the new orders index to a level indicating expansion reflects a V-shaped recovery, or a quick bounce back, Ore said the auto situation means the recovery likely will be much more gradual.

The new orders index expanded to 51.1 in May, rising above the 50 threshold that separates expansion from contraction for the first time since November 2007.

While consumer spending slipped modestly in April, personal income rose 0.5 percent, the biggest monthly increase since May last year, the Commerce Department said.