U.S. manufacturing grew in June and a measure of prices jumped to a 29-year high, underscoring the Federal Reserve's concern that economic growth will be accompanied by faster inflation.
The Institute for Supply Management said Tuesday that its factory index rose to 50.2, defying forecasts of a decline, from 49.6 in May. It was the first reading above 50, the dividing line between expansion and contraction, since January. A gauge of prices paid by manufacturers climbed to 91.5 from 87.
"While it may be too soon to say that manufacturing has begun to start growing again, it is possible that a bottom is being reached," said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pa. At the same time, "Fed members may not be as happy with the costs index moving into the stratosphere."
Stocks and the dollar pared their losses after the report, an indication that federal tax rebates are helping companies weather the housing slump. Economists at Morgan Stanley raised their estimate for second-quarter economic growth to 1.8% from 1.6% after a separate report showed construction spending fell less than anticipated.
Figures from the Commerce Department showed construction spending fell 0.4% in May, less than forecast, as work on hotels, power plants and hospitals helped cushion the slowdown in home building. Private residential projects declined 1.6%, the 25th drop in the last 26 months.
Economists had forecast that the manufacturing index would fall to 48.5, according to the median of 78 projections in a Bloomberg News survey.
"The U.S. manufacturing sector is split between the haves and have-nots, with autos in the have-nots, building materials in the have-nots, exports in the haves," Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, said in an interview with Bloomberg Radio.
A shrinking trade deficit has helped some companies withstand slower U.S. sales. The Institute for Supply Management's export measure cooled to 58.5 from 59.5 in May.
The purchasing managers' gauge of new orders for factories decreased to 49.6 from 49.7. The production measure rose to 51.5 from 51.2.
The institute's index of prices paid jumped to the highest level since July 1979. Economists surveyed by Bloomberg News had forecast the gauge would be unchanged from 87 in May.
"It's a very inflationary environment as far as manufacturers are concerned," Norbert Ore, chairman of the institute's manufacturing survey, told reporters.