Factory activity expands; construction spending up

Manufacturing activity grew in June behind a pickup in new orders, exports and production. Better economic growth overseas is boosting U.S. exports and could help American factories rebound in the second half of the year.

Another report showed that spending on residential housing rose in May to the highest level in 4½ years, helping to send overall construction spending higher despite a big drop in nonresidential activity. Construction spending rose 0.5 percent in May compared with April when spending was up 0.1 percent, the Commerce Department said Monday. Total construction rose to a seasonally adjusted annual rate of $874.9 billion in May, up 5.4 percent from a year ago.

The Institute for Supply Management said Monday that its index of factory activity increased to 50.9 in June. That’s up from 49 in May, which was the lowest reading in four years.

A reading above 50 suggests growth, while those below indicate contraction.

A measure of export orders jumped to 54.5 from 51. That may be a response to growth in Japan and some European countries, economists said.

Still, a measure of manufacturing employment fell in June to 48.7, its lowest level since September 2009. That suggests Friday’s June employment report will show factories cut jobs for the fourth straight month.

Manufacturing had slowed this year after providing crucial support to the economy for the first three years after the recession ended in June 2009. Europe’s slump has weighed heavily on U.S. exports. And businesses cut back on their investment in machinery and equipment in the first quarter.

“The ISM rebound suggested the worst may be past for the global trade slowdown that has contributed to a significant recent soft patch in U.S. manufacturing,” said Ted Wieseman, an economist at Morgan Stanley, in a note to clients.

A report in Europe showed improvement in manufacturing activity in Britain, France and Italy and stabilization in Spain.

And large manufacturers in Japan reported a positive outlook for the first time in nearly two years.

Still, China’s manufacturing sector weakened in June, according to two separate surveys. Factories there were hurt by falling orders from the U.S. and Europe and by Chinese regulators’ efforts to slow lending.

Paul Dales, an economist at Capital Economics, said the growth at American factories suggests the U.S. economy is improving enough for the Federal Reserve to slow its monthly bond purchases as soon as September.

Chairman Ben Bernanke said on June 19 that the Fed could scale back its bond buying later this year and end it next year if the economy continued to strengthen. His comments sent stocks falling and the yield on the 10-year Treasury bond jumped. That also has pushed up mortgage rates.

But stocks have since rebounded and the yield on the 10-year note has dipped since the middle of last week. Favorable reports on the U.S. economy have helped. And several Fed members have clarified that any tapering would hinge on economic improvement, not a specific calendar date.

A bigger test will come Friday when the June jobs report is released, Dales added.

There have been other signs recently that U.S. manufacturers could be starting to recover.

U.S. businesses stepped up their orders for factory goods in April and May. And a category of orders that’s viewed as a proxy for business investment plans — which excludes the volatile areas of transportation and defense — rose 1.1 percent in May, the third straight gain.

Consumers also spent more in May on cars and trucks, which should keep auto factories humming. Sales at auto dealers rose in May by the most in six months, according to the Commerce Department.