Manufacturing Growth Hits 2-Year High; Construction Stumbles

A worker assembles a vinyl window frame at the Milgard Windows & Doors' manufacturing facility in Tacoma, Washington, U.S., on Wednesday, July 24, 2013. The U.S. Census Bureau is scheduled to release monthly construction spending figures on Aug. 1. Photographer: Tim Rue/Bloomberg via Getty Images
Tim Rue/Bloomberg via Getty Images

By Leah Schnurr
and Jason Lange

The pace of growth in the U.S. manufacturing sector accelerated in July to the highest level in two years as new orders surged, supporting the view the economy will pick up in the second half of the year, an industry report showed Thursday.

The Institute for Supply Management said its index of national factory activity rose to 55.4 from 50.9 in June, topping expectations for 52. It was the highest since June 2011.

New orders also racked up their best level in more than two years, jumping to 58.3 from 51.9. Employment gained to 54.4 from 48.7, boding well ahead of the closely watched jobs report due to be released on Friday.

A reading above 50 indicates expansion in the sector.

Export orders slipped to 53.5 from 54.5, though imports were stronger, rising to 57.5 from 56.0.

Hurt by government spending cuts and weaker global demand, manufacturing growth has been lackluster of late and the sector contracted in May.

But the pick up in July added to economists' views that the economy is on stronger footing for the last half of the year. Data released Wednesday showed the economy grew at a quicker than expected pace in the second quarter and should continue to gain momentum.

The data mirrored another report on manufacturing from Markit Economics, also released Thursday. Markit's U.S. Manufacturing Purchasing Managers Index for July rose to 53.4, the highest reading since March.

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Separately, the Commerce Department reported U.S. construction spending unexpectedly fell in June, a possible sign that government budget cuts and a sharp rise in interest rates were weighing on the economy.

Construction spending dropped 0.6 percent to an annual rate of $884 billion.

It was the biggest decline since January, although the government revised upwards its estimate for construction spending in May.

A 1.1 percent drop in public sector outlays factored heavily in the decline.

The federal government enacted steep budget cuts in March, which are expected to squeeze state and local administrations that depend on funds from Washington. Federal construction fell 1.5 percent during the month, while outlays on state and local projects declined 1.1 percent.

The private sector also pulled back in June. Construction spending on homes was flat, while non-residential spending dropped 0.9 percent.

Long term interest rates began rising in May and spiked in June on expectations that the U.S. Federal Reserve would begin scaling back a bond-buying program later this year. The Fed on Wednesday noted that mortgage rates had risen in the United States.

Economists polled by Reuters had expected overall construction spending to rise 0.4 percent in June.

-DailyFinance staff contributed to this report.