* Manufacturing growth slows sharply in July
* Gauge of factory employment slips
* New orders measure contracts; sign of future weakness
* Construction spending rises 0.2 pct in June
(Adds details, market close)
By Lucia Mutikani
WASHINGTON, Aug 1 (Reuters) - U.S. manufacturing grew at
its slowest pace in two years in July as new orders contracted,
casting doubt on expectations the faltering recovery would
quickly regain steam.
The Institute for Supply Management said on Monday its
index of national factory activity fell to 50.9, the lowest
level since July 2009, from 55.3 in June.
Economists had expected a reading of 54.9. A reading below
50 indicates a contraction in manufacturing.
The economy almost ground to a halt in the first half of
the year, data showed on Friday, with output rising at a tepid
1.3 percent annual pace in the second quarter after expanding
at just a 0.4 percent rate in the first three months.
Analysts had pinned the slowdown on temporary factors, but
signs of a pickup are proving elusive and the factory data led
some economists to revisit their forecasts.
"The recent easing in economic growth is increasingly
looking more like a sustained slowdown than a short-lived soft
patch," said Paul Dales, an economist for Capital Economics in
U.S. stocks, which opened higher on relief lawmakers in
Washington had struck a deal to ward off a national default,
turned negative on the weak factory data. The Standard & Poor's
500 Index .SPX closed slightly lower on the day.
Prices for U.S. government bonds rose, while economic
worries lifted the dollar against the euro as investors exited
INSTANT VIEW-US ISM manufacturing PMI [ID:nN1E7700FN]
Graphic - U.S. and global manufacturing:
Graphic - U.S. construction spending:
The slowdown in the U.S. factory sector was part of a
world-wide trend, with global manufacturing activity expanding
at the weakest rate since just after the 2009 recession.
Economists have said the prospect the United States could
default on its obligations had cast a chill over the economy in
July. The deal to lift the nation's $14.3 trillion debt limit
reached on Sunday offered hope of better times ahead.
TRIMMING GDP FORECASTS
Manufacturing, which accounts for about 12 percent of U.S.
gross domestic product, has carried the weak recovery from the
However, activity slowed sharply in May as supply chain
disruptions from Japan's earthquake-related disasters curbed
production. Analysts had expected activity to accelerate as
those disruptions eased.
Last month, factories were held back by weak orders, which
hit their lowest level since June 2009. An index measuring
prices paid also fell, as did a gauge of employment.
"Since orders are a leading indicator, the drop in this
index suggests the second half pickup in growth will be far
less than some had estimated," economists at Wells Fargo
Securities wrote in a research note.
A Reuters poll of economists released on July 14 showed
forecasters expected growth over the second half of the year to
come in at around a 3 percent pace. An increasing number are
now warning that that could be hard to achieve.
A report on Friday is expected to show nonfarm employment
rose by 85,000 in July, an improvement from June's paltry
18,000 gain but disappointing nonetheless. Some economists said
the drop in the ISM employment gauge suggested forecasts for
payrolls might be on the high side.
Separate data from the Commerce Department on Monday showed
construction spending advanced 0.2 percent in June, with
private construction spending rising 0.8 percent to a
seven-month high but public projects dropping 0.7 percent.
Spending for both April and May was revised higher,
suggesting the economy may have had a touch more vigor in the
second quarter than the figures released on Friday showed.
(Reporting by Lucia Mutikani and Mark Felsenthal; Editing by
Andrea Ricci and Andrew Hay)