Factories Strong, Construction Slips

Mon Aug 2, 2004
By Ros Krasny

CHICAGO (Reuters) - U.S. manufacturing expanded further in July, fueling more hiring, but outlays for U.S. construction fell unexpectedly in June to hint at a slowing of the housing boom, reports released on Monday showed.

The Institute for Supply Management's national factory index, at 62.0 in July versus 61.1 in June, suggested that a "soft patch" in the U.S. economy in June might have been the blip that Federal Reserve officials have suspected.

With campaigning for the November presidential election in full swing, the White House hailed the ISM report.

"Today's report is yet another positive economic indicator that shows that our economy is on the right track," U.S. Commerce Secretary Donald Evans said in a statement.

U.S. Treasury prices ended higher as the ISM survey, in line with Wall Street forecasts, was not as strong as some dealers had feared. The 10-year Treasury note yield (US10YT=RR: Quote, Profile, Research) was 4.45 percent versus 4.48 percent late Friday.

Treasury markets were also buoyed by safe-haven buying after intelligence warnings of al Qaeda threats to attack U.S. financial institutions. Those concerns hit the dollar and kept crude oil prices high. Equities prices fell early but bounced back for a higher close.

"Today's (ISM) report provides further verification of the strong state of U.S. manufacturing," said Thomas Duesterberg, president of the Manufacturers Alliance/MAPI in Washington.

Second-half growth would be fueled by strong business equipment investment, purchases of high technology durable goods and robust exports, he said.

"I'm not raising my expectations for the second half, but certainly July gets the second half off to a very strong start," said Norbert Ore, chairman of the ISM manufacturing business survey.

Any reading above 50 in the ISM index indicates growth. The index has been above 50 for 14 straight months and above 60 for the past nine months -- the longest stretch since 1973-74.

The employment component of the ISM index slipped to 57.3 from 59.7 in June but still suggested that Friday's monthly U.S. payrolls report might show factory hiring in July.

Ore said anecdotal evidence suggested the labor market was picking up steam. "There are a lot of signs out there for employment and rehires that haven't been there for quite a while," he said.
New orders, an engine behind potential hiring, rose in July, while the prices paid index fell to a six-month low as some commodity prices -- with the exception of crude oil -- eased back from recent highs.

U.S. Treasury Secretary John Snow said on Monday that continued high oil prices are an economic burden. "It puts headwinds in the way of the recovery," he said in a television interview.

The ISM index is compiled from monthly responses by purchasing executives at more than 400 industrial companies, ranging from textiles and chemicals to paper and computers.

CONSTRUCTION SPENDING SAGS, HOUSES LESS AFFORDABLE

Outlays for U.S. construction fell in June by 0.3 percent, the Commerce Department said. Analysts had looked for no change from May levels. May's spending was revised down to a 0.1 percent gain from a previously reported 0.3 percent advance.

The data suggested a possible cooling of the residential housing market after a long spike driven by extremely low interest rates.

Outlays on private housing fell for the first time in 16 months. Still, economists said it was consistent with June's soft patch and with a number of other housing indicators.

"Everything seemed to be down in June. I don't think it's that reliable of an indicator," said William Cheney, chief economist at John Hancock Financial Services in Boston.

The National Association of Realtors on Monday said rising home prices and interest rates had made U.S. houses less affordable in the second quarter. Its affordability index fell to 133.6 from 144.1 in the first quarter and 143.8 a year ago.

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