updated 7/3/2006 11:45:39 AM ET 2006-07-03T15:45:39

The nation’s manufacturing sector expanded in June, but at a slower pace than analysts expected. Raw materials prices eased a bit.

Major Market Indices

The Institute for Supply Management, a trade group based in Tempe, Ariz., said Monday that its manufacturing index registered 53.8 in June, slightly below the 54.4 reading in May. It was the slowest growth reading since the gauge registered 53.5 last August.

Analysts had forecast a June index of 55 to 56.

A reading of 50 or more indicates expansion, while below 50 indicates contraction. The May figure represented the 37th consecutive month of growth.

The index is watched closely because it is among the first measures of the previous month’s economic activity.

The results reinforced the belief of many experts that the U.S. economy has begun to slow as higher interest rates have reduced demand for housing while rising fuel prices have put a crimp in consumer spending. As a result, analysts expect that the Federal Reserve, which last Thursday raised short-term rates for the 17th consecutive time, may soon be able to take a pause.

“If other June data also paint a picture of moderation ... ahead of the August Federal Open Market Committee meeting, the Fed May want to pause to see whether the slowdown is temporary or not,” Bear Stearns economist John Ryding said in a research note. “However, inflation readings remain elevated and we still see the Fed raising the funds rate to 5.5 percent at some point in the third quarter.”

The funds rate, which is the interest banks charge each other on overnight loans, currently stands at 5.25 percent.

Thomas J. Duesterberg, president and chief executive officer of the Manufacturers Alliance-MAPI in Arlington, Va., said June’s reading was “consistent with a slowdown in manufacturing this year.”

He said that strong growth in 2005 and early 2006 “probably wasn’t sustainable” and that slower growth “would be in line with our projections.”

Norbert J. Ore, chairman of the ISM’s survey committee, said that although manufacturing showed slower growth last month, “renewed strength in June’s new orders index provides encouragement for the third quarter.” The manufacturing sector, he added, was “benefiting from the weaker dollar and business investment.”

The ISM’s new orders index registered 57.9 in June, up from 53.7 in May, while the backlog of orders went to 54 in June from 53 the month before.

The price index was 76.5 last month, down from 77 in May.

“While energy and raw material prices are still a concern, our members indicate that they are coping with the challenges and generally see their businesses in a continuing growth mode,” Ore said.

The ISM report said 14 industries reported growth in June: petroleum, tobacco, instruments and photographic equipment, furniture, chemicals, wood and wood products, paper, primary metals, industrial and commercial computers, fabricated metals, food, transport and equipment, electronic components and equipment, and the miscellaneous category.

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