Factory Activity Steady; Construction Spending Inches Up

By Lucia Mutikani

WASHINGTON -- U.S. manufacturing activity held steady at firmer levels in June and automobile sales were on track to beat expectations, pointing to momentum in the economy after a rough winter.

The Institute for Supply Management said Tuesday its index of national factory activity was at 55.3, little changed from May's 55.4 reading. A reading above 50 indicates expansion.

The forward-looking new orders subindex hit a six-month high, but factory employment was unchanged.

"Manufacturing has gathered some momentum in the second half of the year. That's an important pillar for the economy along with housing. The details are better with new orders rising," said Ryan Sweet, senior economist at Moody's Analytics in West Chester, Pennsylvania.

Separately, early sales reports indicated the auto industry overall had a better-than-anticipated showing last month, even though there were two fewer selling days than a year ago.

General Motors (GM) bucked Wall Street's low expectations and negative publicity over a flood of safety recalls, reporting a modest rise in U.S. sales in June.

Chrysler Group and Nissan Motor also reported year-to-year increases Tuesday. They, along with Ford Motor (F), topped analyst expectations.

%VIRTUAL-WSSCourseInline-956%The reports were the latest to suggest the economy rebounded in the second quarter after a weather-induced slump earlier in the year. However, another report showing construction spending barely rose in May indicated that second-quarter growth could fall short of expectations.

Economic growth contracted at a 2.9 percent annual pace in the first quarter, also weighed down by a slow pace of inventory accumulation by businesses.

Economists last week slashed their second-quarter growth estimates after weak consumer spending in May. Growth forecasts are now running as high as a 3.5 percent pace and as low as a 2.1 percent rate.

Construction spending edged up 0.1 percent to an annual rate of $956.1 billion, the Commerce Department reported. However, April's data was revised up to show a 0.8 percent rise in construction spending, taking some of the sting out of the report.

Economists had expected construction spending to advance 0.5 percent after a previously reported 0.2 percent gain.

Construction spending in May was held back by a 0.3 percent decline in private construction projects, which offset a 1 percent rise in public construction outlays. Private construction accounts for the largest portion of construction spending.

Private residential construction tumbled 1.5 percent, reflecting weak housing starts.

A run-up in mortgage rates has stymied the housing market recovery. Investment in home building and nonresidential structures such as factories and gas pipelines contracted in the first three months of this year for a second straight quarter.

Spending by the federal government dropped 8.9 percent, the largest fall since December 2010. State and local government projects increased a solid 2 percent.

-Additional reporting by Richard Leong and Ryan Vlastelica in New York.