Manufacturing Growth Slows

Building Activity Down 0.4% in May

Construction spending declined in May for the second straight month. (By Ethan Miller -- Getty Images)

NEW YORK, July 3 -- The U.S. manufacturing sector expanded at a slower rate than expected in June and construction spending plunged in May, reinforcing the belief of some analysts that increasing sluggishness in the economy will prompt the Federal Reserve to pause at last in its credit-tightening regime.

The Institute for Supply Management, a trade group based in Tempe, Ariz., said Monday that its manufacturing index registered 53.8 in June, slightly below the 54.4 reading in May. It was the slowest growth reading since the gauge registered 53.5 last August.

Analysts had forecast a June index of 55 to 56.

A reading of 50 or more indicates expansion, while below 50 indicates contraction. The May figure represented the 37th consecutive month of growth.

In Washington, the Commerce Department reported that building activity fell 0.4 percent in May to a seasonally adjusted annual rate of $1.206 trillion, after a 0.2 percent decline in April. It was the first time in more than three years that construction spending had fallen for two consecutive months. May represented the biggest one-month decline since a 0.7 percent fall in September 2004.

The softness in construction is just one of several signals of slowdown that the economy sent in the spring as gasoline prices rose, interest rates increased and the housing market cooled.

Analysts said it could get the Fed to think twice before raising the federal funds rate yet again. On Thursday, the Federal Open Market Committee raised the rate for the 17th consecutive time, to 5.25 percent.

"If other June data also paint a picture of moderation . . . ahead of the August FOMC meeting, the Fed may want to pause to see whether the slowdown is temporary or not," Bear Stearns economist John Ryding said in a research note. "However, inflation readings remain elevated and we still see the Fed raising the funds rate to 5.5 percent at some point in the third quarter."

Norbert J. Ore, chairman of the ISM survey committee, said that although manufacturing showed slower growth last month, "renewed strength in June's new orders index provides encouragement for the third quarter." The manufacturing sector, he added, was "benefiting from the weaker dollar and business investment."

"While energy and raw material prices are still a concern, our members indicate that they are coping with the challenges and generally see their businesses in a continuing growth mode," Ore said.