July Manufacturing Unchanged; Construction Falls

U.S. factory activity held up to stand unchanged in July from June, managing to defy forecasts of a contraction and showing inflation pressures moderating, according to a report released Friday.

The Institute for Supply Management said its index of national factory activity edged down to 50.0 from 50.2 in June.

This was above economists' median forecast for a result of 49.3 in July, according to a Reuters poll. The 80 forecasts in the survey ranged from 47.8 to 52.5.

An index reading above 50 indicates that the manufacturing economy is expanding. Below that level signals it is contracting, while a result of 50 means there is no change from the previous month, according to the ISM.

The ISM manufacturing index was mired below 50 for four consecutive months before June as the economy struggled in the face of a credit crunch brought on by the worst U.S. housing slump since the Great Depression of the 1930s.

"While the (index) indicates little to no change has occurred during this period, it would be hard to convince manufacturers who are faced with higher costs and uncertain demand that there is little change taking place," ISM said in a statement.

Inflation pressures subsided but remained at a relatively high level. The index for prices paid fell to 88.5 in July from 91.5 in June, which was the highest level since July 1979. Prices paid had been rising since March.

The report suggested the manufacturing sector is holding up reasonably well with the help of the export-boosting effects of a weak dollar despite weakness in the overall economy.

However, high commodity prices remain a threat even though they dipped, while there was some erosion in the strength of exports as the global economy encountered headwinds.

"Manufacturing is not growing and not contracting. There's good news on exports and bad news on domestic demand," said Kevin O'Marah, chief strategy officer at AMR research in Boston, Massachusetts.

"But we have a serious inflation threat. The price component of the ISM manufacturing index was staggeringly high for the fourth month in a row."

Reaction in financial markets was mixed.

Stocks extended their losses on the day. The dollar briefly extended its gains versus the euro. Government bonds, which benefit mostly from signs of economic weakness, initially held onto earlier losses but were last trading narrowly mixed.

The manufacturing jobs picture improved, hitting its highest since April 2007 with a rise in the employment index to 51.9 from 43.7.

This appeared at odds with a report earlier in the day showing the U.S. unemployment rate hit its highest level in four years during July as employers cut jobs for the seventh month in a row.

Exports remained a relatively strong performer, though growth there eased. The exports index fell to 54.0 from 58.5, hitting its lowest since December 2007.