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Factories rebound in June, but hiring down

Ford Assembly workers install a battery onto the chassis of a Ford Focus Electric vehicle at the Michigan Assembly Plant in Wayne, Michigan
Ford Assembly workers install a battery onto the chassis of a Ford Focus Electric vehicle at the Michigan Assembly Plant in Wayne, Michigan

By Steven C. Johnson

NEW YORK (Reuters) - Manufacturing expanded last month, rebounding from an unexpected contraction in May, but hiring in the sector was the weakest in nearly four years, which could make the Federal Reserve think twice about how soon to scale back its stimulus.

A separate report on Monday showed construction spending neared a four-year high in May, a sign that it is regaining some strength after having collapsed during the 2007-2009 recession.

But even with recent consumer and housing data suggesting the U.S. economy is on a path of moderate growth, pockets of concern remain, particularly with regard to employment.

The Institute for Supply Management (ISM) said its index of national factory activity rose by slightly more than expected in June to 50.9 from 49, with a reading above 50 marking expansion.

The gauge for new orders rose to 51.9 from 48.8, while production jumped to 53.4 from 48.6, helping the overall index bounce back from May's contraction - the first in six months.

"It's nice to see manufacturing moving back into growth territory from contraction," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

But a measure of employment fell to 48.7, the lowest reading since September 2009. It stood at 50.1 in May.

That could feed concern about the strength of the U.S. recovery, particularly now that the Federal Reserve has said it could wind down its massive stimulus program later this year.

"Unfortunately on the employment side, they are not hiring," Naroff said. "That's not a good sign. The employment issue is key. If those jobs are not there, you are not going to get consumer demand."

A separate index from financial information provider Markit also showed modest growth in the sector but sharp slides in hiring and new orders from abroad.

"Firms are responding to the increasingly worrying order book trend by pulling back on recruitment," said Markit chief economist Chris Williamson.

Construction spending, meanwhile, neared a four-year high in May, though difficulties in the commercial real estate and factory sector kept the pace of recovery subdued.

The rise in the ISM main index helped U.S. stocks start the third quarter on a positive note, with major indexes rising 1 percent or more.

But government bond prices were little changed as traders feared the decline in factory hiring could bode ill for a broader U.S. employment report due on Friday.

Economists polled by Reuters estimated 165,000 jobs were added to U.S. payrolls in June, a bit below the average of about 189,000 new jobs per month over the first five months of 2013.

Bradley Holcomb, chairman of the ISM Manufacturing Business Survey Committee, said the decline in factory hiring last month breaks "a long, long stream of employment going back to 2009."

But he said "I think it's more a reaction to what has transpired so far this year," adding that "as new orders improve, we would hope to see employment come back into positive territory."

Economists polled by Reuters last month forecast growth in the broader U.S. economy slowing to a 1.7 percent annual rate in the second quarter, though most say it should pick up steam in the second half of the year.

Paul Dales, senior U.S. economist at Capital Economics in London, said the fall in factory employment in June would be consistent with declines in manufacturing payrolls of more than 50,000 per month.

"But since this survey has been too pessimistic relative to payrolls for most of the last year, we are sticking to our payrolls forecast of a 150,000 rise in June," he said, which would leave the Fed on track to start winding down its monthly bond purchases as soon as September.

(Additional reporting by Richard Leong and Ellen Freilich in New York and Lucia Mutikani in Washington; Editing by Andrea Ricci and Chizu Nomiyama)

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