NEW YORK (Reuters) - U.S. manufacturing growth eased in September to its slowest in more than a year, but home sales and construction figures suggested a less abrupt decline in the housing sector than many experts had foreseen.

ADVERTISEMENT

A weakening industrial sector could spell bad news for the economy as a whole, however, since economists had been counting on business investment to cushion some of the blow from a housing-related drop in consumer spending.

The Institute for Supply Management's manufacturing index fell to 52.9 in September, its lowest since May 2005. That was down from 54.5 in August and modestly beneath a median Wall Street forecast of 53.5. A reading above 50 indicates an expansion.

"It's apparent that manufacturing is losing momentum and feeling the effects of higher interest rates and a weaker housing market," the ISM said in its report, released on Monday.

At the very least, a recent drop-off in home sales appeared to be abating, with an index of pending home sales rising 4.3 percent in August -- the first increase since May.

Construction spending also grew unexpectedly in August, but that was only because commercial and public projects offset more declines in home-building. Spending rose 0.3 percent, confounding estimates for a 0.3 percent decline.

Wall Street had a belated reaction to the morning's batch of figures, with the dollar off a bit against major currencies and government bond prices benefiting from the prospect of softer economic growth. Stocks were little changed.

While no one expects the housing market to rebound any time soon, the data provided some hope that pullback in the sector would be less drastic than some fear.

The U.S. economy is powered in large part by consumer spending, which in turn has been fueled by the disposable income generated by a buoyant housing market. Analysts worry that as this engine of growth withers, the economy could take a spill.

Already, growth tapered off significantly in the second quarter, with gross domestic product registering less than half its first-quarter rate of expansion.

The details of the ISM factory survey suggested this broad-based softness was also hitting manufacturers fairly hard.

The report's employment index slipped below 50 for the first time since June, suggesting employers are once again more prone to laying off workers than they are to take on new hires. The new-orders measure held steady but production eased, indicating an decrease in actual output levels.

The only real cause for relief was the prices paid index, which fell to its lowest since July of last year as the effects of lower crude oil prices alleviated cost pressures for manufacturers.

Most economists expect the economy to coast to a softer rate of growth in coming months, but some have started to discuss the possibility of recession in 2007 or the year after. Monday's data indicated things were not that bad yet.

"To support forecasts for much weaker growth, we'd need to see the housing sector continue to shrink, home prices need to show weakness and a deceleration in other parts of the economy," said Dan Seto, senior economist at Sumitomo Mitsui Asset Management.