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U.S. 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 to
hint at a slowing of the housing boom, reports released on Monday

The Institute for Supply Management said its index of national factory
activity rose to 62.0 in July from 61.1 in June, right in line with
Wall Street forecasts.

"Apart from the slight hiccup in June, everything is consistently
positive for the manufacturing sector," said William Cheney, chief economist
at John Hancock Financial Services in Boston.

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 ISM report suggested that a "soft patch" in the U.S. economy in
June might have been the blip that Federal Reserve officials have
suggested and not a change in direction.

"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.

Outlays for U.S. construction fell in June by 0.3 percent, the first
drop in 16 months, 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.

U.S. Treasury prices held early gains on Monday as the ISM survey was
not as strong as some had dealers had expected. The benchmark 10-year
Treasury note (US10YT=RR: Quote, Profile, Research) yield was 4.46
percent versus 4.48 percent late Friday.

The ISM's employment component slipped to 57.3 from 59.7 in June. Some
analysts had feared a bigger drop after the Chicago purchasing
managers' survey on Friday showed net job losses in the Midwest.

"The employment index, while it declined, remains incredibly strong,"
said Mark Vitner, senior economist at Wachovia Securities in Charlotte,
North Carolina.

ISM's 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.
ISM's prices paid index eased to 77.0 from 81.0 as commodity prices
fell back from recent highs. New orders, the engine behind potential
hiring, rose to 64.7 from 60.0 in June. Inventories fell to 49.9 from 51.1.

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.


The construction spending data suggested a possible cooling of the
housing market after a spike in residential building over the past year
driven by extremely low interest rates.

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," John Hancock's Cheney said.

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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