* ISM factory activity index falls to 49.0 in May
* Construction spending rises 0.4 pct in April
* Auto sales on track to rise 6 pct in May from last year
By Leah Schnurr
NEW YORK, June 3 The U.S. manufacturing sector
contracted in May, driving activity to the lowest level in
nearly four years, in the latest sign the economy is
encountering a soft patch.
Still, growth is not expected to pull back sharply, and
separate data on Monday showed construction spending rose
slightly in April, though it trailed expectations. In addition,
U.S. auto sales for May were on track to gain in line with
forecasts. Monthly auto sales provide an early snapshot of U.S.
The Institute for Supply Management (ISM) said its index of
national factory activity in May fell to 49.0 from 50.7 in
April, short of expectations for 50.7. It was the lowest level
since June 2009, when the economy was coming out of recession.
A reading below 50 indicates contraction in the
manufacturing sector. The last time the ISM manufacturing index
fell below 50 was in November, shortly after the U.S. East Coast
was hit by a massive storm.
Last month's regional manufacturing snapshots were mixed,
with activity in New York State and the mid-Atlantic region
contracting, but Chicago rebounding.
Nationwide, economic growth in the second quarter is
expected to slow from the 2.4 percent rate posted in the first
three months of the year, partly due to tighter fiscal policy in
Washington. Even so, the recovery is expected to regain traction
in the second half of the year.
"There's nothing here that indicates a recession, just that
things are going to be perhaps a little bit softer," said Scott
Brown, chief economist at Raymond James in St. Petersburg,
"The key question, particularly for the Fed, is what does
the data imply for the future?" Brown said. "Are things going to
be strong enough that they're going to pick up in the second
half? That expectation is still there but it's probably on shaky
The Federal Reserve is currently buying $85 billion a month
in bonds as part of its efforts to boost the economy. Investor
attention has turned to when the U.S. central bank may slow or
stop the bond buying program.
The Fed's chairman, Ben Bernanke, rattled financial markets
last month when he said the Fed could cut back its purchases as
soon as at one of its next few meetings.
The contractionary ISM report for May reduces what was
already a small risk that the Fed could begin tapering its
purchases when it meets later this month, Amna Asaf, an
economist at Capital Economics, wrote on Monday. But it doesn't
change the outlook for the economy to pick up later in the year,
said Asaf, who expects the Fed to begin tapering "well before
A top Fed official, John Williams, head of the San Francisco
Fed, on Monday reiterated his view that an improving economy
would allow the central bank to pare back its bond buying in the
summer. The Fed will hold its next policy meeting on June 18-19.
The ISM's gauge for new orders dropped to 48.8 from 52.3,
while a measure of employment edged down to 50.1 from 50.2.
Production fell to 48.6 from 53.5.
The exports index fell to 51.0 from 54.0, while imports held
up relatively better, slipping slightly to 54.5 from 55.0.
U.S. stocks were mostly lower at midday after a volatile
morning, while Treasuries prices rose after the
weaker-than-expected data and the dollar fell across the board.
A separate manufacturing report was somewhat at odds with
the ISM data. Activity picked up slightly in May though the pace
was still sluggish, according to financial data firm Markit,
whose Manufacturing Purchasing Managers Index (PMI) rose to 52.3
in May from 52.1 in April.
The ISM data is more closely watched in financial markets
than the PMI data, in part due to its long history.
Overseas, euro zone manufacturing contracted again last
month, while Asian factories lost momentum.
Rounding out the economic data in the United States,
construction spending rose 0.4 percent to an annual rate of $861
billion in April, the Commerce Department reported. The gain was
smaller than the 0.8 percent increase forecast by analysts
polled by Reuters.
The report suggested government belt-tightening was holding
back growth. Public sector spending at construction sites fell
1.2 percent in April, hit by a sharp decline in state and local
outlays, which hit a seven-year low.
Private residential construction spending eased 0.1 percent
lower. Businesses, however, ramped up spending to build
utilities, and overall private nonresidential construction
spending rose 2.2 percent.
In the U.S. auto market, the improving housing market helped
spur sales of pickup trucks, which drove a rise in auto sales in
May after a disappointing April. Total U.S. auto sales for the
month were on track to meet analyst expectations of a 6 percent
rise from last year, to about 15.1 million vehicles on a
seasonally adjusted annualized rate.
Sales of Ford Motor Co's F-Series pickup truck, the
best-selling vehicle in North America since the 1970s, soared 31
percent for its best May performance since 2005.