US ISM manufacturing index rises for 3rd straight month despite weak capital spending

Manufacturing activity in the United States rose for the third month in a row despite sluggish growth in new orders coupled with weak overseas demand and capital spending in the energy sector.

The Institute for Supply Management (ISM) said its index of national factory activity increased half a percentage point to a reading of 51.3 last month. The increase in the index largely reflected a jump in prices paid by factories for raw materials. A reading above the 50-point mark suggests expansion in economic activity.

Manufacturing accounts for around 12 percent of the US economy. Despite a good reading of the manufacturing index, manufacturing remains constrained by the lingering effects of the appreciating dollar and fall in global oil prices between June 2014 and Dec 2015.

"The rise in the ISM exaggerates the underlying tone in the U.S. manufacturing sector. While the jump in supplier deliveries is a good thing from an inventory perspective, it is perhaps a signal of weaker production activity ahead," said Millan Mulraine, Deputy Chief Economist, TD Securities, New York.

A Reuters poll of economists had forecasted construction spending to rise 0.6 percent in April after a previously reported 0.3 percent increase in March. Construction outlays were up 4.5 percent from a year ago.

"With the value of the dollar having moved lower since the beginning of the year and with financial stress largely having abated, we expect manufacturing output to move largely sideways this year before eventually returning to a modest positive trend," Barclays said in a report.

However, report from the Commerce Department showed construction spending tumbled 1.8 percent, the largest decline since January 2011, after an upwardly revised 1.5 percent jump in March. Construction spending was previously reported to have increased 0.3 percent in March.

Further, auto sales also recorded fall owing to weak demand and lesser selling days in May. Ford Motor Co. reported a 6 percent drop in sales last month from a year earlier. It estimated overall U.S. sales would decrease by about 8 percent in May. On the other hand, General Motors, the largest US automaker, witnessed 18 percent decline in sales last month, suggesting a slowdown in consumer spending in the same month.

As a result of the soft report, the Atlanta Federal Reserve cut its second-quarter gross domestic product estimate by four-tenths of a percentage point to a 2.5 percent rate. However, the sharp upward revision to March's construction spending suggests the government's first-quarter GDP growth estimate could be revised higher, reports said.