NY factories produce dour news

By Burton Frierson

NEW YORK (Reuters) - The sickly U.S. factory sector produced more bad news on Monday, with a gauge of manufacturing in New York state contracting in June for the fourth time in five months.

Confidence in the housing sector, the origin of the current economic downturn, also weakened this month. Home builder sentiment matched the lowest level on record set in December, an industry group said.

The reports highlight the dilemma for the Federal Reserve, which has tried to boost the economy with interest rate cuts, even though this risks fueling inflation. Price growth is already elevated due to high oil and commodity prices.

The New York Fed's "Empire State" report on factories showed inflation pressures remained high in June. At the same time, it highlighted the weak state of the state's factory sector, boding ill for other regional reports to follow.

"The theme that came of this report is softer demand and elevated costs," said Jonathan Basile, economist at Credit Suisse in New York.

The Empire State general business conditions index fell to minus 8.68 from minus 3.23 in May.

The report reflects a national factory sector that had already contracted in May for the fourth consecutive month while inflation pressures surged to their highest in four years, as reported earlier this month by the Institute for Supply Management.

The factory sector has been hit by the wider U.S. economic slowdown, led by the bursting of the housing bubble last year.

Economists polled by Reuters had expected a reading of minus 2.00 in the Empire State report.

In a separate report, the Treasury Department said foreign appetite for U.S. securities recovered in April after suffering during the worst of the credit crisis.

On Wall Street, blue chip stocks were flat in early afternoon trade, while the Nasdaq gained. The dollar slid against the euro and government bonds, which benefit from weak economic conditions and poor stock market performance, rose slightly.

RAISING DOUBTS

Bonds received a boost from a Washington Post column by Robert Novak that raised doubts over whether the Fed would raise interest rates to fight inflation.

Novak wrote that Federal Reserve Chairman Ben Bernanke does not intend to raise interest rates because he is more worried that soaring oil prices will slow global growth rather than fire inflation.

Novak's column, citing unnamed "sources close to him," said Bernanke "has no plans for a raise."