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msnbc.com news services
updated 8/2/2010 11:16:50 AM ET 2010-08-02T15:16:50

The manufacturing sector is slowing, but at least it's still growing, according to an index released Monday.

Growth in the manufacturing sector weakened in July to the slowest pace this year, an industry trade group said. The Institute for Supply Management said its manufacturing index slipped to 55.5 in July from 56.2 in June. A reading above 50 indicates growth.

It was the 12th straight month the index showed growth, although it was the third straight month of slower growth. Economists polled by Thomson Reuters had forecast a lower reading of 54.1. Stock markets in the U.S. added to early gains after the data came in stronger than expected.

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The report's employment component rose to 58.6 from 57.8 in June

A swell of production in factories has helped lead the economic recovery as exports increased and companies rebuilt their stocks, which had dwindled during the downturn.

ISM's index shows momentum has been slowing since spring as consumer demand lags investment from businesses.

Federal Reserve Chairman Ben Bernanke highlighted that slowing impetus Monday, saying the U.S. economy is improving but has yet to recover fully, with high unemployment and a weak housing market weighing on consumers.

In remarks to state legislators that focused heavily on the problems faced by budget-strained state and municipal governments, Bernanke said constrains at the local level were also hindering the national rebound.

"We have a considerable way to go to achieve full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure, and lost savings," Bernanke said.

Meanwhile, The Commerce Department said construction spending rose 0.1 percent in June. While that was better than the decline economists had forecast, the government sharply revised down its estimate of activity in May to show a drop of 1 percent rather than the 0.2 percent dip initially reported.

The lackluster performance for construction was the latest indicator that the overall economy slowed in the spring, raising worries about the durabilty of the recovery that began a year ago.

Peter Ellis, senior economist at Decision Economics in New York, said some of the manufacturing data could be worrisome down the road.

"Even though the decline in the headline number is smaller than expected, the composition shows weakness, particularly in new orders, which is bad news," said Ellis.

"So far the impact on business sentiment is limited because the employment index is actually up a little bit. That signals that companies remain confident for the moment," he said.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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