"If manufacturing really is doing better, then it brings back inflation into the equation," said Jay Suskind, director of trading at Ryan Beck & Co. "But pending home sales were weak again, and this brings back the market to talk of stagflation."
The Dow Jones Industrial Average was up 6.7 points at 13,055, as 19 of its 30 components advanced, led by Hewlett-Packard Co. and Honeywell Co.
Bucking the trend, shares of Procter & Gamble Co. dropped 2.4% after the personal care products maker narrowed its outlook range.
Also on the Dow, General Motors Corp. fell 0.7% ahead of U.S. auto sales figures later in the session. Alcoa Inc. , which supplies aluminum to the auto industry, dropped 3%.
Microsoft Corp. rose 0.7%. The software giant may offer somewhere "in the $1 billion range" for internet advertising firm 24/7 Real Media , according to The New York Post.
The S&P 500 dropped 1.7 points to 1,480, while the Nasdaq Composite eased 9.2 points to 2,516.
Trading volumes showed 1 billion shares exchanging hands on the New York Stock Exchange and 1.4 billion trading on the Nasdaq stock market. Declining issues outpaced gainers by 19 to 12 on the NYSE and by 9 to 5 on the Nasdaq stock market.
By sector, oil services , utilities and natural gas led the gains, while airlines , financials and gold fell.
In addition, media stocks jumped following news that News Corp. has launched a $60 per share bid for Dow Jones , publisher of this report. Shares of Dow Jones surged 52%.
Among media stocks, McClatchy Co. rose 4.7%, Gannett Co. Inc. rose 3%, and Tribune Co. gained 0.3%.
The market lost early gains after the Institute for Supply Management said its manufacturing index bounced back to 54.7% in April from 50.9% in March, following seven weak months. Economists expected the index to stay soft at 51%.
A sharp drop in the dollar might have helped manufacturers boost their exports, noted Ryan Beck & Co.'s Suskind. "That would be OK, but it throws a monkey wrench into the equation," he said.
But if a real turn around happened, then inflation worries are likely to resurface, Suskind said.
At the same time, the National Association of Realtors said its index of pending home sales fell by 4.9% in March, indicating sales closed in April are likely to remain soft. The index is also down 10.5% from a year earlier and is at its lowest level in three years.
"The Fed is in a predicament, facing slowing growth versus inflation," said Ryan Beck & Co's Suskind. "Friday's jobs report is going to be very important."
While earnings have for the most part easily beat Wall Street expectations, which had been lowered sharply, investors are keen to decipher the economic trends for the rest of the year.
Economic reports, especially the April employment report on Friday, will receive particular attention ahead of next week's Federal Reserve meeting on interest rates.
Most economists expect the Fed, which has been on hold since last summer, to leave the key overnight unchanged at 5.25%. But there could be switches in stance in the policy communiquC).
"The focus is clearly shifting to the economy as the Fed gets set to meet next week," said Marc Pado, chief U.S. market strategist at Cantor Fitzgerald. "While no one is looking for the Fed to move in either direction, the mix of inflation data and economic weakness is causing some investors to lock in April's profits."
The auto sales reports should dribble out throughout the day. The MarketWatch forecast, based on the median of preditions collected from economists, is for a total of 12.1 million cars sold by General Motors, Ford Motor Co. and DaimlerChrysler AG's Chrysler unit combined.
On Monday, U.S. stocks closed lower, after investors consolidated some of the hefty gains posted in April, while weighing at a revealing not only tame inflation but also a weakening The Dow finished with a 58 point loss, the S&P 500 fell 11.7 points and the Nasdaq Composite dropped 32 points.
There was little overnight market news, as most European markets, save London, were closed for May Day celebrations and there was scant data in Japan.
Stocks in Motion
Retailer Circuit City Stores Inc. dropped 11%. The company withdrew its fiscal first-half 2008 outlook and said its fourth-quarter loss from continuing operations will widen due to the timing of revenue recognition of Internet-oriented sales.
Citigroup later downgraded the stock to hold, warning that more bad news could be on the way.
Billionaire investor Carl Icahn continued his bid for a seat on Motorola Inc.'s board by sending an open letter to shareholders that is being published as a full-page advertisement, according to a media report Tuesday.
Pfizer Inc. won a Canadian appeals-court ruling. A lower court would have allowed Teva's Canadian unit Novopharm to launch a generic version of Pfizer's Celebrex pain reliever.
Treasurys fell back following the ISM report. The benchmark 10-year Treasury note last was down 7/32 at 99-24/32 with a yield of 4.650%.
The dollar turned around and showed strength against both the yen and the euro.
Crude-oil futures fell, one day ahead of weekly data on supplies that's expected to show a modest build in crude stocks, but further declines in gasoline supplies. Also, Iran agreed Monday to join international talks on security in Iraq. Crude for June delivery was down 56 cents at $65.11 a barrel.
Gold futures fell as the dollar advanced. Gold for June delivery declined $6.40 to $677.20 an ounce on the New York Mercantile Exchange.
By Nick Godt