Factory, Building Data Show Growth

U.S. manufacturing expanded in May at its fastest pace in more than two years, while construction in April posted unexpected strength, reports showed Monday, adding to recent evidence of a broadening U.S. economic recovery.

The Institute for Supply Management said its monthly manufacturing index rose more than expected in May to 55.7--its highest level since hitting 56.7 in February 2000--from 53.9 in the previous month and its fourth straight month of growth. Any level above 50 suggests growth.

The Commerce Department, meanwhile, reported that spending to build homes, offices and schools rose 0.2% to an annual rate of $871.9 billion in April. March’s pace was revised downward to $870.5 billion.

The positive data were tempered by a drop in auto sales during May, which economists said may signal growing consumer caution that would dampen the pace of the rebound.

The ISM index was driven higher by a pickup in demand for goods, which could signal further strength in coming months. Although factories continued to shed workers, they did so at a slower pace, with industries such as furniture production and publishing hiring workers. That could augur well for the May payroll report due Friday.

After an 18-month slump driven by a record runoff of inventories, factories this year have boosted production to meet increases in new orders.

So far, the improvement has yet to translate into new hiring or stronger capital investment, which Federal Reserve officials have said they want to see to ensure a sustainable recovery is underway.

Until that happens, most analysts expect the central bank to keep the key fed funds rate target --the rate banks charge each other for overnight loans--steady at a 40-year low of 1.75%. But recent reports show that the foundation for better business spending and job growth is beginning to fall into place, some economists said.

ISM’s closely watched new orders index, a measure of pipeline demand for goods, rose in May to 63.1 from 59.0 in April.

Prices surged to the highest level since January 2001, driven by higher energy and steel prices, the ISM report showed. The prices index rose to 63.0 in May from 60.3 a month earlier. While potentially inflationary, the rise in prices could give companies much needed pricing power.