U.S. Factories Show Vulnerability to Chill in Global Economy

economy ism factory manufacturing weekly jobless claims
Rick Bowmer/APA Boeing employee works on a horizontal stabilizer for a Boeing 787 Dreamliner at the company's plant in Salt Lake City.

By Jason Lange

WASHINGTON -- The pace of growth at U.S. factories slowed in September, a sign that the chill falling over the global economy could complicate the Federal Reserve's plans to raise interest rates.

Other data released Thursday pointed to a tightening labor market and stronger spending on home construction, highlighting the split in the economy between strong domestic growth and weakness abroad.

This is causing headaches at the Fed, which cited concerns last month about "global economic and financial developments" when it surprised much of Wall Street by holding off on hiking rates.

%VIRTUAL-WSSCourseInline-876%The Institute for Supply Management said its index of national factory activity fell to 50.2, its lowest since May 2013 and just below the median forecast in a Reuters poll.

While any reading above 50 indicates expansion in manufacturing, growth has slowed sharply over the last year as a strong dollar has crimped exports.

More recently, a slowdown in China has sent a chill throughout the global economy. The ISM's index for exports held steady at 46.5, marking a contraction in activity for the fourth straight month.

The dollar drifted lower while yields on Treasury debt also declined. Wall Street stocks were trading lower.

Despite the weakness abroad, the domestic economy and the labor market have appeared on more solid footing, which has boosted expectations the Fed could hike rates this year or in early 2016.

The Labor Department said the number of new applications for U.S. jobless benefits rose modestly last week, although they remained near 15-year lows and a gauge of the trend in claims fell.

Initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 277,000 for the week ended Sept. 26.

"Filings at this level are incredibly low by historical standards, speaking to how tight labor markets are getting," said Stephen Stanley, an economist at Amherst Pierpont Securities.

U.S. construction spending climbed in August to the highest level since 2008, the Commerce Department said in a separate report. The gains were boosted by a surge in outlays for residential projects and gave a sign the housing market was helping the overall economy.

In another sign of domestic strength, the three U.S. automakers -- General Motors (GM), Ford Motor (F) and the U.S. operations of Fiat Chrysler Automobiles (FCAU) -- reported a jump in September sales as cheap gasoline and ultra-low interest rates drove demand for sport utility vehicles and pickup trucks.

-Sam Forgione contributed reporting from New York.

Originally published