The manufacturing sector gathered more strength in May, a report from corporate purchasing managers indicated yesterday, but two other measures suggested the economy is moderating from the breakneck pace it set in the first quarter.

While the National Association of Purchasing Management's factory index rose to 55.2 in May, up from 52.8 in April and the highest reading since the start of the Asian financial crisis, the Commerce Department said April construction spending fell 2.4 percent and the Conference Board's index of leading indicators fell for the first time in almost a year.

"Clearly, the economy is moderating," said Merrill Lynch & Co. economist Bruce Steinberg.

But financial markets discounted much of the economic news, focusing on evidence in the purchasing managers' report that prices paid by producers for materials had risen, and stock and bond prices slumped. The Dow Jones industrial average fell 150 points before rebounding to close up 36.52 points, while the Standard & Poor's 500-stock index and the Nasdaq composite index finished lower and the yield on the 30-year Treasury bond rose to 5.94 percent.

Analysts said the markets are worried that any slowdown in the economy, especially in the consumer sector, which accounts for two-thirds of economic activity, will not be enough to alleviate concerns about inflation. The Federal Reserve Board's policymaking committee said last month that it was leaning toward raising interest rates should the economy continue to expand at a rapid clip and inflation accelerate.

Most observers believe the Fed would prefer an economy growing no faster than a 3 percent annual rate, about 25 percent slower than its pace so far this year. Fed Chairman Alan Greenspan has warned about "imbalances" in the economy, though by most measures inflation is still benign.

Economists will be watching Friday's employment report for further indications on the economy's strength, and then on June 16 the report on the May consumer price index will show whether April's CPI was a fluke. Some economists say the sharp 0.7 percent rise in prices in April was caused by one-time increases in tobacco, clothing and energy prices and was not the start of a trend.

Both reports will come in advance of the June 29-30 meeting of the Federal Open Market Committee, which sets short-term interest rates for the Fed.

Last week, the government reported that consumer spending slowed sharply in April after accounting for inflation, as rising oil prices claimed some of the money consumers presumably would have spent on other items. Economists seized on the news to conclude the economy was slowing down.

What may be happening, though, is a shift in the economy rather than any wholesale slowdown. Consumers benefited last year from the financial crisis in emerging markets, as global investors sought out the safety of U.S. government bonds, bringing U.S. interest rates down. As rates fell, consumers borrowed heavily or refinanced mortgages and spent the proceeds. The stock market, meanwhile, rose sharply amid the buoyant economy, with the Dow setting an all-time record last month, further fattening the purses of consumers who saw their mutual funds and retirement accounts swell in value.

But that situation could be changing, as global demand rises once again and the industrial sector expands, putting upward pressure on rates. Consumers, meanwhile, may be taking a breather, particularly since stock markets have retreated from their highs of early spring amid concern about rising interest rates.

The April construction report was interpreted by some as the first evidence higher rates are crimping the housing market. But others believe April suffered in comparison with unusually strong activity earlier in the year because of a warm winter.

Spending on single-family homes surged at an 18.1 annual percentage rate in the first quarter, with apartment and town-home spending rising at more than twice that pace.