Inflation flare-up mars factory rebound

By Burton Frierson

NEW YORK (Reuters) - Manufacturing expanded in June for the first time in five months, helped by a weak dollar, but inflation pressures soared to their highest level since the stagflation-ravaged 1970s, according to a report that highlighted the bind facing policy-makers.

A separate report on Tuesday by the government showed U.S. construction spending fell 0.4 percent in May as homebuilding continued to deteriorate. The data adds to concerns the United States is in a period of weak growth accompanied by high inflation.

"It paints a slowing-growth scenario with rising inflation. That's a tough path for the Fed to traverse," said George Adell, fixed-income strategist at Commerce Capital Markets in Jupiter, Florida.

U.S. auto sales plunged in June, but a month-end clearance sale helped General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) retain its No. 1 spot and steer clear of the wipeout many had feared, driving its shares up.

The Institute for Supply Management said its index of national factory activity rose in June to 50.2, topping the 50 level that marks expansion for the first time since January.

Economists attributed the increase to a weak dollar, which helps exports, and some restocking of inventories.

While the index was just above forecasts and May's reading of 49.6, the report also showed manufacturers are slashing jobs while being pinched by soaring prices and weak demand.

Federal Reserve officials will pay particular attention to the prices paid gauge of inflation, which jumped to the highest level since July 1979.