Factory Sector Contracts at Slower Rate

By MICHAEL S. DERBY and JEFF BATER The U.S. factory sector continued its slow but steady trek out of the recession in July. In a separate report, spending on U.S. construction projects unexpectedly rose in June, making its second increase in three months as signs of a recovery emerge in the housing sector. The Institute for Supply Management reported Monday that activity showed a reduced rate of contraction, with its manufacturing index standing at 48.9, from 44.8 in June and 42.8 in May. The index had been seen at 46.5. Readings under 50 signal that activity is shrinking, so July's report doesn't signal a return to health for this key sector of the economy. That said, the index has been on the mend for much of the year, booking less negative readings, on a path that could soon see factory activity once again in expansion mode. "It would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggests that we will see growth in the third quarter if the trends continue," said Norbert Ore, who directs the survey for the ISM. The factory sector is particularly important because activity there often leads the broader economy. The ISM report arrives at a time where many policy makers and private sector economists see an end to the recession looming into view, even though few expect to see a robust rebound follow. Part of what underpins confidence in the recovery is the belief that after such a deep pull back, inventories of many types of goods will need to be restocked. That argues for increased factory output, and as such, the improvement in the ISM manufacturing index suggests this process may be happening now. In the report, the ISM found notable improvements. The July production index was 57.9, from 52.5. while the new orders index was 55.3, versus June's 49.2. Hiring was still weak, however, with that reading at 45.6, from 40.7 the month before. Inventories shrank at a slower pace, at 33.5, after the prior month's 30.8 reading. Inflation, a topic of worry for many, was higher. The prices index for July came in at 55.0. It had been at 50.0 in June. Construction Spending Rose in June Total spending climbed by 0.3% to a seasonally adjusted annual rate of $965.66 billion compared to the prior month, the Commerce Department said Monday. Wall Street had expected overall spending on construction would decrease, falling by 0.5%. Commercial construction spending inched higher. Public-sector construction spending rose to an all-time high. Spending fell 0.8% in May; originally, May spending was seen 0.9% lower. Year-over-year, spending in June was down 10.2% since June 2008. June residential construction spending climbed 0.7% to $253.8 billion. Residential spending fell 3.2% in May, a revision up from the originally reported decrease of 3.5% for the month. Spending in April rose 1.5%. Year over year, residential spending was 29.3% below the June 2008 level. New evidence suggests the housing market is beginning to recover from its long crisis. Sales of single-family homes rose 11.0% in June, the government said last week. It was the fourth increase in six months. Higher demand has emboldened builders; home construction unexpectedly rose in June, up by 3.6%. Building permits also climbed. Monday's data said nonresidential construction spending increased 0.1% during June. Outlays climbed for roads and amusement parks and fell for hotels. Year over year, spending for commercial construction was down 0.7%. A big fall is expected in commercial construction. In parts of the U.S., office vacancy rates are up. Rents are down. Credit is tight. The Federal Reserve's latest "beige book" review of the economy described commercial real estate leasing markets as either "weak" or "slow" in all regions of the U.S.; the severity of the downturn varied somewhat, depending on the area. Construction spending in the private sector during June decreased by 0.1% to $643.9 billion. Spending fell 1.4% in May. Spending by the government on construction rose a fifth straight month in June -- even though the economy's slump has cost municipalities money. Government revenues have fallen because of rising unemployment, which cuts into income taxes, and falling home values, which eats up property taxes. Companies have seen business drop in the recession, meaning they're paying less in taxes to the government. The 1.0% gain in June public-sector construction spending, to $321.7 billion, followed a May climb of 0.4%. Federal government construction outlays surged 1.9% in June. State and local spending, which is much larger than federal spending in dollars, increased by 1.0%. Write to Michael S. Derby at michael.derby@dowjones.com and Jeff Bater at jeff.bater@dowjones.com