Index shows rise in factory activity

U.S. manufacturing last month expanded at its fastest pace in almost a year, while pending home sales in March fell to their lowest in four years, according to reports Tuesday that gave mixed signals on the economy.

The Institute for Supply Management said its index of national factory activity rose to 54.7 in April from 50.9 in March, above the median forecast of 51 among analysts polled by Reuters. The reading was the highest since May 2006.

For the third month in a row, the index held above 50, an indication of manufacturing growth.

Two of the manufacturing index’s component measures, new orders and employment, also showed notable improvement after a string of weak to mediocre readings.

Signs of higher inflation also appeared. The manufacturing report’s prices paid component jumped to 73, the highest level since August 2006, from March’s 65.5. Economists blamed the surge largely on a resurgence in energy prices.

With gasoline prices rising, consumers have been reluctant to open their wallets to buy other goods.

Even so, it remains uncertain whether the April pickup in factory activity will prove strong enough to offset a slump in housing and lift economic growth after an anemic quarter.

“It’s a shocking strong number on the manufacturing sector given the fairly weak indicators in April,” said Keith Hembre, chief economist of FAF Advisors Inc. in Minneapolis. “But my feeling is that it will be short-lived, given the weaker tone of the domestic economy.”

The National Assn. of Realtors said its gauge of pending sales of existing U.S. homes fell 4.9% to 104.3 in March, its lowest in four years. That compares with an upwardly adjusted reading of 109.7 in February.

The median forecast of analysts surveyed by Reuters was for a March reading of 109.

Home sales remained soft because of the fallout from sub-prime lending problems. Potential home buyers with sub-prime or risky credit are having a tougher time obtaining a mortgage, as banks and other lenders are tightening their lending requirements to curb future losses from bad loans.

“We’re starting to see the effects of a decline in sub-prime lending and tighter lending standards,” said David Lereah, chief economist with the realtors association.

Two reports showed mixed results on chain-store sales last week. Redbook Research and the International Council of Shopping Centers/UBS said sales improved last week over the previous week, but year-over-year growth remained weak.