By AP Business Writer
updated 8/1/2006 12:20:40 PM ET 2006-08-01T16:20:40

The nation's manufacturing sector expanded in July at a faster clip than in June, while companies paid significantly more for raw materials, a trade group said Tuesday.

Major Market Indices

The Institute for Supply Management, based in Tempe, Ariz., said its manufacturing index registered 54.7 in July, above the 53.8 June reading and stronger than analysts' estimates of 53.5 to 53.8.

A reading of 50 or more indicates expansion, while below 50 shows contraction. The July figure represented the 38th consecutive month of growth.

The prices paid index jumped 2 percentage points to 78.5 in July from 76.5 in the previous month, signaling that rising prices for everything from fuel to paper could begin to eat into manufacturers' profits.

"Manufacturers are in a cost squeeze situation _ high commodity prices are affecting profitability," said Dan Meckstroth, chief economist for the Manufacturers Alliance/MAPI trade group in Washington, D.C. "So in general, the report is positive, but there are underlying issues that show that going forward, manufacturing is going to slow."

Those factors include the ISM's new orders index, which slipped to 56.1 in July from 57.9 in June, and the backlog of orders index, which dropped to 50.5 in July from 54.0 the month before.

Also, the exports index fell to 51.9 in July from 55.4 in June, while the imports index rose to 57.5 from 56.5_ indicating that foreign competition is strengthening, Meckstroth said.

Still, U.S. manufacturing is outpacing the nation's gross domestic product. The Commerce Department said Friday that GDP advanced at an annual rate of just 2.5 percent in the April-to-June period, less than half that of the previous three months.

"When you view the overall economy, manufacturing is holding up quite well," said ISM survey committee chairman Norbert J. Ore.

"Growth is slowing, but the rate of decline is not very rapid," Ore added, noting the average index for the first half of the year is 55.3, and July's 54.7 reading is only slightly below that. "I certainly feel pretty good about the third quarter at this point, and momentum carrying into fourth quarter."

The ISM readings came on the back of a report from the Commerce Department that showed weakening consumer spending and quickening inflation.

Many economists believe U.S. economic growth has started to flag as higher interest rates have crimped demand for housing, while surging fuel prices are hurting consumer spending.

The ISM report is one of many that the Federal Reserve will examine to decide whether to raise short-term interest rates on Aug. 8. Analysts are split on whether the Fed, which in June raised rates for the 17th consecutive time, will hike them again or take a pause. The funds rate, or the interest banks charge each other on overnight loans, is currently 5.25 percent.

Share prices fell on Wall Street due to worries about rising inflation and the likelihood of another interest rate hike. In late morning trading, the Dow Jones industrial average fell 85.49, or 0.76 percent, to 11,100.19. The Standard & Poor's 500 index lost 9.80, or 0.77 percent, to 1,266.86, and the Nasdaq composite index dropped 31.39, or 1.5 percent, to 2,060.08.

The 12 industries that reported growth in July were: primary metals; food, beverage and tobacco products; electrical equipment, appliances and components; chemical products; furniture and related products; miscellaneous manufacturing; petroleum and coal products; computer and electronic products; paper products; plastics and rubber products; nonmetallic mineral products; and machinery.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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