U.S. factories expand in October; construction spending falls

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. factory activity increased for a second straight month in October amid a pickup in production and hiring, supporting views manufacturing would regain some momentum in the fourth quarter.

The Institute for Supply Management (ISM) on Tuesday said its index of national factory activity rose 0.4 percentage point to a reading of 51.9 percent last month. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.

The production sub-index gained 1.8 percentage points to 54.6. But a gauge of new orders slipped to a reading of 52.1 from 55.1 in September, suggesting any future gains in manufacturing activity would be modest. A measure of factory employment jumped 3.2 percentage points to a reading of 52.9.

The data came as Federal Reserve officials gathered for a two-day meeting to deliberate on monetary policy. The U.S. central bank is not expected to raise rates at the end the meeting on Wednesday, which comes less than a week before the Nov. 8 presidential election, but is expected to do so in December.

Manufacturing has been hamstrung by the lingering effects of the dollar's surge between June 2014 and December 2015, which has constrained exports. The collapse in oil drilling activity in the aftermath of a plunge in oil prices has also weighed on factories. That has contributed to business spending on equipment declining for four straight quarters.

TURNAROUND LIKELY MODEST

While there are signs that a turnaround may be imminent, any gains in manufacturing will likely be mild.

Heavy machinery maker Caterpillar last week reported a 49 percent drop in third-quarter profit from a year ago and lowered its full-year revenue outlook for the second time this year. Caterpillar said demand for new heavy machinery had been undercut by an "abundance" of used construction equipment, a "substantial" number of idle locomotives and a "significant" number of idle mining trucks.

Last month, 10 manufacturing industries, including nonmetallic mineral products, furniture, and computer and electronic products reported growth. The eight industries reporting contraction in October included wood products, apparel and primary metals.

U.S. financial markets were little moved by the data.

In a separate report on Tuesday, the Commerce Department said construction spending slipped 0.4 percent after an upwardly revised 0.5 percent drop in August. Construction outlays were down 0.2 percent from a year ago.

Economists polled by Reuters had forecast constructionspending rising 0.5 percent in September after a previously reported 0.7 percent drop in August. July's outlays were revised up to show them rising 0.5 percent instead of falling 0.3 percent as previously reported.

Spending on private construction projects dipped 0.2 percent in September, with outlays on residential construction rising 0.5 percent after falling 1.2 percent in August. The government reported on Friday that residential construction was a drag on economic growth in the third quarter. Spending on private nonresidential structures, which includes factories, hospitals and roads, tumbled 1.0 percent in September, the largest drop since December 2015, after rising 0.5 percent the prior month.

Investment in nonresidential structures contributed to the economy's 2.9 percent annualized growth rate in the third quarter. Public construction spending declined 0.9 percent in September, falling to its lowest level since March 2014. Outlays on state and local government construction projectsfell 0.8 percent, declining for a third straight month. Federal government construction spending tumbled 1.9 percent after surging 4.8 percent in August.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)