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Factories Boosted, Services Soar

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America's factories saw orders grow stronger in June, a spot of good news for manufacturers and for the economic recovery.

And July saw service sector activity heat up strongly and mark a 16th straight month of growth, even as employment conditions softened, according to a report released Wednesday.

The Commerce Department reported Wednesday that orders placed with U.S. factories rose by a solid 0.7 percent in June from the previous month. The performance exceeded economists' expectations for a 0.5 percent advance.

The increase, the largest since March, was up from a 0.4 percent rise in May.

Meanwhile, the Institute for Supply Management said its non-manufacturing index for last month moved to a robust reading of 64.8, versus the 59.9 seen in June and 65.2 in May.

The non-manufacturing index covers activity in the service sector, which makes up a large majority of overall U.S. economic activity. Readings in the survey and its components above 50 indicate the breadth of growth seen, but do not describe the size of the gain seen by individual survey respondents.

In the Commerce Department report, orders for "durable" goods, costly manufactured items expected to last at least three years, posted a 0.9 percent increase in June, a turnaround from the 0.9 percent drop the month before.

Demand for machinery, fabricated metal products, airplanes for the military and electrical equipment were among the categories of durable goods showing gains in June.

For nondurable goods, such as food, orders rose by 0.5 percent in June, following a strong 2 percent increase in May. Meat, poultry and seafood products, chemicals, and plastics and rubber goods were among the categories posting increases in orders for June.

There were spots of weakness in the report. Orders for cars, computers and household appliances were among the categories showing declines.

Other recent economic reports — including the nation's employment situation, retail sales and industrial production — indicated that the economy cooled a bit in June.

The Commerce Department reported Tuesday that consumer spending dropped by a sharp 0.7 percent in June from the previous month. The retrenchment came after consumers splurged in May, ratcheting up spending by a strong 1 percent.

On Monday, the Commerce Department reported that construction spending slipped 0.3 percent in June after expanding a revised 0.1 percent in May.

Last week, the Commerce Department reported that the U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the last recession.

The size of the slowdown caught economists by surprise.
Many were looking for stronger second quarter growth of 3.6 percent, according to a survey conducted by CBS MarketWatch.

The Federal Reserve meets next week and many economists are predicting policy-makers will boost short-term interest rates by one-quarter percentage point, which would mark the second rate increase this year. The Fed on June 30 pushed up a key rate to 1.25 percent, from a 46-year low of 1 percent. It marked the first rate rise in four years and was aimed at making sure that inflation doesn't become a problem for the economy, which is on a solid recovery path despite hitting some potholes in June.

Federal Reserve Chairman Alan Greenspan, appearing on Capitol Hill last month, acknowledged as much but predicted that economic activity would pick up in the months ahead. Early indicators for July, including automobile sales, seem promising on that score.

The Institute for Supply Management said Monday that U.S. manufacturing expanded for the 14th consecutive month in July, boosted by new orders and higher production.

The nation's manufacturing sector was hardest hit by the 2001 recession and has struggled mightily to get back on firm footing since then. Although the recovery road has been bumpy for manufacturers, economists predict factory activity will improve.

But it's far from clear how that will translate into a sustained rebound in manufacturing jobs. Factories lost 11,000 jobs in June, disappointing news after logging an increase of 75,000 jobs in the previous four months.

The government on Friday will release a report on the nation's employment situation for July. Economists are hopeful that payrolls will grow by around 200,000, which would mark an improvement from the lackluster 112,000 net positions added in June.

The July supply reading proved better than the 61.5 mark forecasters expected it to hit. The survey joins other numbers, like the ISM's report on manufacturing, that suggest that July was a solid month for the economy.

"July's index indicates continued growth across most non-manufacturing industries," the ISM said in its report, noting that the service sector has grown in every month except March 2003, since February 2002. "In July, 12 industry groups reported growth, one indicated contraction, and four reported business unchanged from June," the group said.

The components comprising the non-manufacturing ISM were generally positive. The group's employment index stood at 50.0 in July, indicating no growth, after 57.4 in June and 56.3 in May. Meanwhile, the ISM service sector new orders index increased to 66.4, versus 62.4 the month before.

The ISM noted that the flat performance of hiring in July broke a nine-month streak of gains, and said comments by survey respondents were not particularly conclusive in terms of their reading on hiring.