US manufacturing gained momentum in June while consumer sentiment improved, reports showed on Friday, offering evidence that the economy is strong enough to allow the Federal Reserve to continue raising interest rates to keep inflation in check.
A jump in new orders enlivened the manufacturing sector, which overcame the hurdle of soaring energy prices, at least temporarily, according to the Institute for Supply Management's manufacturing survey.
The group said its index of national factory activity climbed to 53.8 in June from 51.4 in May, well above economists' forecasts of a slight uptick.
The rise was "a pleasant surprise," said Ian Shepherdson, chief US economist at High Frequency Economics. It "reduces the odds that the ISM will slip below 50."
A reading above 50 on the ISM index reflects expanding activity; a reading below 50 signals contraction. June's increase eased concerns about a possible retrenchment in the industrial sector after some regional surveys revealed surprising weakness.
However, Norbert Ore, the ISM executive in charge of the survey, said the June reading was probably a stronger level than the index could sustain in the second half of the year.
The University of Michigan said its measure of confidence rose to 96.0 in June from 86.9 in May, according to market sources who saw the subscription-only report. The preliminary June reading was 94.8.
The survey's expectations component rose to 85.0 in June from 75.3 in May, while sentiment on current conditions rose to 113.2 from 104.9 in May.
Consumer spending accounts for two-thirds of overall US economic activity, and any improvement in confidence is seen as a precursor to stronger growth.
However, the government reported that construction spending fell 0.9 percent in May, an unexpectedly weak report for a part of the economy that had been buoyed by low interest rates.
Construction outlays in May fell to a seasonally adjusted annual rate of $1.103 trillion from a revised $1.113 trillion in April, the Commerce Department said. Analysts had expected a 0.5 percent increase.
Private residential construction dropped 1.7 percent, possibly indicating the start of some slowing in the brisk housing market, while private non-residential construction, often seen as a sign of business confidence, dropped 1.6 percent to an annual rate of $241.94 billion.
FACTORY JOBS SHAKY:
The ISM's manufacturing employment measure rose to 49.9 from 48.8 in May, an improvement, but still suggesting managers were cautious about hiring. It was the second month of contraction in manufacturing employment, according to the ISM.
New orders, a signal of future growth, surged to 57.2 from 51.7. But analysts said the overall monthly gain might be more of a periodic reprieve than the start of a turnaround. A leading index of the US economy edged higher in the latest week with help from fewer jobless claims and lower commodity prices, a report said on Friday.