WASHINGTON U.S. factory activity slipped in July and consumer spending advanced at its slowest pace in four months in June, indicating the economy lost some momentum recently.
But that could be temporary as automakers on Monday reported U.S. sales increased solidly last month after dipping in June, keeping the industry on track for its best year in a decade.
The sluggish economic data did not change economists' expectations that the Federal Reserve will hike interest rates this year, given a tightening labor market.
"We expect growth momentum to re-accelerate over the next few months, providing the Fed with the necessary confidence they need to raise rates in September," said Millan Mulraine, deputy chief economist at TD Securities in New York.
The Institute for Supply Management said its national factory activity index fell to 52.7 last month from 53.5 in June. A reading above 50 indicates expansion in manufacturing.
A gauge of new orders received by factories rose to a seven-month high, while inventories continued to decline.
There was growth in 11 of the 18 manufacturing industries, including furniture, fabricated metal products, electrical equipment, appliances and components, and transportation equipment. Five industries including machinery reported that production had contracted in July.
Dollar strength has hobbled manufacturing, pressuring the profits of multinational corporations. Deep spending cuts in the energy sector after last year's plunge in crude oil prices have taken their toll too, while weak global demand has also been a drag on manufacturing, which accounts for about 12 percent of the U.S. economy.
"The negatives of the strong dollar, slower-than-expected foreign growth and lower oil prices appear to still be exerting a negative influence through an inventory adjustment," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.
U.S. stocks ended lower as slumping oil prices pushed energy shares to a three-year low. U.S. Treasury debt prices were mostly up and the dollar rose slightly against a basket of currencies.
CONSUMERS STEP BACK
In a separate report, the Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2 percent in June after a 0.7 percent increase in May. When adjusted for inflation, consumer spending was unchanged after rising 0.4 percent in May.
The data was included in last week's second-quarter gross domestic product report, which showed consumer spending expanding at a 2.9 percent annual rate and the overall economy growing at a 2.3 percent pace.
The Fed last week described the economy as expanding "moderately," upgraded its view of the labor market and said housing had shown "additional" improvement. Its assessment left the door open for a possible rate hike in September, which would be the first increase in nearly a decade.
Consumer spending in June was restrained by a decline in auto purchases. But with auto sales accelerating in July, spending likely gathered steam last month, and is expected to be supported by rising incomes as the jobs market approaches full employment and firming home prices boost household wealth.
U.S. auto sales rose 5.3 percent to 1.51 million vehicles, above the 3 percent rise expected by analysts, according to Autodata Corp. That translates to an annualized sale rate of 17.55 million vehicles in July and keeps the auto industry on pace for its best year since 2000.
High-margin pickup trucks helped sales of market leaders General Motors Co (GM.N) and Ford Motor Co (F.N), which each showed gains that were more than double analysts' estimates.
"Durable goods consumption looks off to a good start heading into the third quarter," said Jesse Hurwitz, an economist at Barclays in New York.
Personal income rose 0.4 percent in June, increasing by the same margin for a third straight month. Inflation remained well below the Fed's 2 percent target.
A price index for consumer spending rose 0.2 percent after gaining 0.3 percent in May. In the 12 months through June, the personal consumption expenditures (PCE) price index rose 0.3 percent. Excluding food and energy, prices edged up 0.1 percent for the third straight month.
It was up 0.148 percent before rounding. The so-called core PCE price index rose 1.3 percent in the 12 months through June.
"There is a hint of an upward trend here that might help reassure policymakers that headline inflation will head toward the Fed's target rate once oil prices stabilize," said John Ryding, chief economist at RDQ Economics in New York.
(Reporting by Lucia Mutikani; Additional reportig by Bernie Woodall in Detroit; Editing by Paul Simao and James Dalgleish)