* Private sector adds 163,000 jobs in July
* ISM shows manufacturing shrank for 2nd month
* Markit data shows manufacturing growth slowed
* Federal Reserve keeps course, says economy weaker
By Leah Schnurr
NEW YORK, Aug 1 U.S. companies hired more
workers than expected in July, but continued weakness in the
manufacturing sector pointed to sluggish economic growth.
The economic recovery has lost steam in recent months as it
has been buffeted by the euro zone debt crisis, a struggling
U.S. labor market and concerns over higher taxes and government
spending cuts that are set to take place early next year.
Economists said Wednesday's data suggested further slow
growth after a 1.5 percent growth rate in the second quarter,
though the economy should avoid recession.
"I don't see any evidence that the weakness is truly feeding
on itself at this point but at the same time, there's no obvious
spark for the economy to look a lot better in the next few
months, either," said Jim O'Sullivan, chief U.S. economist at
High Frequency Economics in New York.
The data came as Federal Reserve held off from offering any
new stimulus to boost the economy even as it signaled further
bond buys could be forthcoming.
Fed officials characterized the economy as having
"decelerated somewhat" and repeated their disappointment with
the slow pace of progress in bringing down the 8.2 percent
Since the economy is in "just more of a slower growth
environment they're (the Fed) willing to keep any actions until
they're needed to a greater extent," said Dwight Johnston,
chief economist at the California and Nevada Credit Union League
in Ontario, California.
High unemployment and weak consumer confidence took a toll
on U.S. automakers as General Motors, Ford and
Chrysler Group reported lower-than-expected sales for July.
The ADP National Employment Report showed private employers
created 163,000 jobs in July, more than the 120,000 that had
been expected though slightly less than June's 172,000. June was
originally reported as 176,000.
"The U.S. continues to have consistently positive private
sector payroll growth, albeit at a painfully slow rate," said
Eric Stein, VP and portfolio manager at Eaton Vance Management
The ADP figures come ahead of the government's much more
comprehensive labor market report on Friday, which includes both
public and private sector employment.
That report is expected to show nonfarm payrolls rose by a
modest 100,000 last month, while the unemployment rate is seen
staying the same at 8.2 percent.
Economists estimate the labor market needs to create about
125,000 jobs a month to keep the unemployment rate steady,
though estimates vary.
Analysts often refer to the ADP report to fine-tune their
expectations for the payrolls numbers, though it is not always
accurate in predicting the outcome.
The ADP report has differed from the government's private
jobs number by an average of about 50,000 so far this year, said
Cooper Howes, economist at Barclays.
If that continues, it would be in line with a forecast for a
gain of 100,000 nonfarm payrolls last month, said Howes.
U.S. stocks were modestly lower in mid-afternoon as
investors digested the Fed statement, while the dollar
strengthened and Treasuries prices retested session lows.
Two separate reports on manufacturing - previously a tent
pole of the recovery - showed the sector continued to falter.
A report from the Institute for Supply Management showed
manufacturing activity contracted for a second month in a row in
July as new orders improved modestly but employment dropped to a
ISM's index of national factory activity inched up to 49.8
from 49.7 in June, shy of economists' expectations for 50.2.
A reading below 50 shows contraction in the sector.
Forward-looking new orders remained in contraction territory
but improved to 48 from 47.8. The gauge of employment slid to
its lowest since December 2009 at 52 from 56.6.
Exports continued to tumble and were down at 46.5 from 47.5.
The index has lost 13 points since February.
A survey from Markit showed manufacturing fared slightly
better than ISM indicated as the sector managed to grow, though
the pace was the slowest in nearly three years.
The final Markit U.S. Manufacturing Purchasing Managers
Index fell to 51.4 from 52.5 in June as it was also hurt by
falling export orders.
Overseas, manufacturing activity in the euro zone contracted
for the 11th straight month in July as the downturn deepened. As
well, China's official measure of factory activity fell to an
Separate data showed U.S. construction spending rose
modestly in June as investment in new homes and home improvement
countered a drop-off in public works projects funded by the
Another report showed lending to small businesses fell in
June to the lowest level since October with the Thomson
Reuters/PayNet Small Business Lending Index falling to 98.5 from
103.8 in May.