US manufacturing gauge drops to eight-month low

WASHINGTON(Reuters) - A measure of U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders, but that likely exaggerates the industry's struggles as production at factories rebounded sharply in the second quarter.

The Institute for Supply Management (ISM) said on Thursday that its manufacturing PMI dropped to 46.8 last month, the lowest reading since November, from 48.5 in June. A PMI reading below 50 indicates contraction in the manufacturing sector, which accounts for 10.3% of the economy.

Despite declining for a fourth straight month, the PMI remained above the 42.5 level that the ISM said over time generally indicates an expansion of the overall economy.

Economists polled by Reuters had forecast the PMI edging up

to 48.8.

Though manufacturing has been undercut by higher interest rates, the situation is probably not as dire as suggested by sentiment surveys such the ISM. So-called hard data from the government and Federal Reserve suggests the industry has stabilized.

Data from the Fed last month showed factory production rebounded at a 3.4% annualized rate in the second quarter after contracting at a 1.3% pace in the January-March quarter.

The Commerce Department last week reported that spending on goods had picked by the second quarter after hitting a soft patch in the first three months on the year, with motor vehicles helping to power economic growth.

The U.S. central bank on Wednesday kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been since last July, but opened the door to reducing borrowing costs as soon as its next meeting in September.

The ISM survey's forward-looking new orders sub-index fell to 47.4 last month from 49.3 in June. Output continued to decline, with the production sub-index sliding to 45.9 from 48.5 in June. Despite subdued orders, manufacturers faced higher prices for inputs, likely reflecting soaring freight rates.

The survey's measure of prices paid by manufacturers increased to 52.9 from 52.1 in June. Its measure of supplier deliveries rose to 52.6 from 49.8 in June. A reading above 50 indicates slower deliveries.

Factory employment continued to shrink as firms reduce head counts through layoffs, attrition and hiring freezes.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)