U.S. factory sector suffers end-of-year chill

By Jason Lange

WASHINGTON (Reuters) - The U.S. factory sector grew at its slowest pace in six months in December, a sign that weakness in the global economy is weighing on the United States.

The Institute for Supply Management (ISM) said its index of national factory activity fell to 55.5 last month from 58.7 in November.

A reading above 50 indicates expansion in the manufacturing sector, and the reading remains well above its two-year average. That means the slowdown appears unlikely to derail a broader strengthening of the U.S. economy.

"These were readings that in any ordinary time would be considered excellent," Guy Berger, an analyst with RBS Securities, said in a note to clients.

Prices for U.S. Treasuries rose and the U.S. dollar was up against a basket of currencies after the data. U.S. stock indexes also were trading higher.

Still, the data suggests weakness abroad and a surge in the value of the dollar, which is near its strongest level since 2005, are inflicting pain on key parts of the U.S. economy. A gauge of factory exports fell to 52 in December from 55 in the previous month.

At the same time, the weakness in global demand also has pushed oil prices lower, enabling American consumers to spend more and boost the U.S. economy.

The economy went on a tear in the third quarter, when it grew at a 5 percent annual rate, and many economists expect a generally strong showing in the second half of 2014 will continue into this year, leading the U.S. Federal Reserve to raise interest rates sometime in 2015.

"It makes sense that manufacturing activity should be coming off the boil," said Paul Dales, an economist with Capital Economics, "But the strength of domestic demand will ensure that industry and the wider economy still perform particularly well in 2015."

The data suggested that employment in the factory sector rose more in December than analysts had expected, marking the 18th consecutive month of expansion in manufacturing employment sentiment.A separate report showed U.S. construction spending unexpectedly fell in November, held back by a drop in government outlays and by less money spent by businesses on projects other than homes.

Construction spending fell 0.3 percent, the first decline since June, to an annual rate of $975 billion, the Commerce Department said.

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Graphics:

U.S. PMI: Markit vs. ISM: http://link.reuters.com/geg47v

U.S. manufacturing: ISM PMI: http://link.reuters.com/xek62w

U.S. construction spending: http://link.reuters.com/vus72w

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(Reporting by Jason Lange; Additional reporting by David Gaffen in New York; Editing by Paul Simao)