Growth in the US manufacturing sector slowed more than expected in May and factory hiring turned negative, raising concerns about weakness in the US economy, a report showed on Wednesday. Still, the US housing market remained frothy, with construction spending for April at a record high as low mortgage interest rates kept the housing boom alive. Financial markets mostly keyed off the Institute for Supply Management's index of national manufacturing activity, with both stock and bond investors finding elements to like.
The ISM index fell to 51.4 in May from 53.3 in April, its lowest point in almost two years and below median Wall Street forecasts of 52.1. The good news was that the indicator held above 50, a level that separates growth from contraction, for a 24th straight month - the longest such streak in 16 years.
"The ISM index is still showing growth and that's probably the most important thing," said Patrick Fearon, senior economist with A.G. Edwards and Sons in St. Louis.
"It's obvious that the manufacturing sector, while still growing, has been losing momentum at a much more rapid rate than it did in 2004 and early 2005," Norbert Ore, chairman of the ISM manufacturing committee, said in a teleconference. If ISM falls below 50, based on the current trend, it may be stuck below that threshold for "a number of months," he said.
ISM's employment sub-index fell to 48.8, the first reading below 50 since October, stirring fears of a soft May payrolls report from the Labour Department on Friday and hinting at a possible slowing in the Federal Reserve's pace of interest rate rises.
The Fed has gradually raised its federal funds target rate to 3.0 percent from 1.0 percent last June.
"Although the factory sector is a declining share of US economic activity, the magnitude of the slowdown over the past year will concentrate the Federal Open Market Committee's attention," said Steven Wood, economist at Insight Economics.
Dallas Federal Reserve President Richard Fisher told CNBC TV that the central bank is "in the eighth inning" of its program of raising interest rates, which raised hopes that the Fed will soon take a pause.
However, he subsequently told the Wall Street Journal's online edition: "The economy is strong. It's inflation that's still a risk."
Some bond investors like PIMCO's Paul McCulley in a newsletter released last week, argue that the Fed under Chairman Alan Greenspan has never raised US interest rates when the ISM index has fallen below 50.
In other news, US construction spending for April jumped by a smaller-than-expected 0.5 percent but still reached another record high at a seasonally adjusted annual rate of $1.067 trillion. Economists had forecast an increase of 0.7 percent on the month.
In a potential sign of rising business confidence, private non-residential construction climbed 1.3 percent to its highest rate since May 2002.
US consumers have helped keep the construction boom alive by taking advantage of low mortgage interest rates.
Fed officials have warned recently that fast-rising home values may be unsustainable in some areas as interest rates rise.
Another report issued on Wednesday showed applications for US home mortgages fell in the latest week despite a decline in interest rates, with new purchasing and refinancing both falling.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity slipped 2.8 percent. Refinancing applications eased 1.2 percent while the purchase index fell 4.1 percent.
Sales of both new and existing homes reached new records in April, according to reports last week.
A separate report by the National Association of Realtors said pending sales of existing US homes hit a record in April, indicating that sales in May and June could strike new highs yet again.