Factory growth slows, casts shadow on economy

Mon Aug 1, 2011 5:13pm EDT
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By Lucia Mutikani

WASHINGTON (Reuters) - Manufacturing grew at its slowest pace in two years in July as new orders contracted, casting doubt on expectations the faltering recovery would quickly regain steam.

The Institute for Supply Management said on Monday its index of national factory activity fell to 50.9, the lowest level since July 2009, from 55.3 in June.

Economists had expected a reading of 54.9. A reading below 50 indicates a contraction in manufacturing.

The economy almost ground to a halt in the first half of the year, data showed on Friday, with output rising at a tepid 1.3 percent annual pace in the second quarter after expanding at just a 0.4 percent rate in the first three months.

Analysts had pinned the slowdown on temporary factors, but signs of a pickup are proving elusive and the factory data led some economists to revisit their forecasts.

"The recent easing in economic growth is increasingly looking more like a sustained slowdown than a short-lived soft patch," said Paul Dales, an economist for Capital Economics in Toronto.

U.S. stocks, which opened higher on relief lawmakers in Washington had struck a deal to ward off a national default, turned negative on the weak factory data. The Standard & Poor's 500 Index closed slightly lower on the day.

Prices for U.S. government bonds rose, while economic worries lifted the dollar against the euro as investors exited riskier bets.   Continued...