NEW YORK—U.S. factory activity contracted in May for the fourth consecutive month and inflation pressures surged to their highest since in four years, heightening concerns about the world's largest economy.
The Institute for Supply Management said its index of national factory activity rose in May to 49.6 from April's 48.6, below the level of 50 that signals contraction although slightly above market expectations. Combined with the ISM's data on inflation, the report gave rise to concerns about stagflation—rising prices in a weak economy.
This year's manufacturing slump is the worst since 2003, when the ISM index spent five consecutive months below 50 from February to June that year.
A separate report showing construction spending, struggling with a protracted housing slump, fell less than expected in April added weight to the argument that the economy is weak but may not be in recession.
"This is consistent with an economy that's still expanding, not one that's in recession. So things are soft but are not collapsing," said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.
"You have an inflation threat that's been there for a while. I think it has been enhanced by the Fed's easy monetary policy."
The contraction in the May ISM index was the fifth in six months. The report also showed a worrying trend for inflation, with its index of prices paid jumping to 87.0—its highest since April 2004—from 84.5 in April.
On Wall Street, stocks extended losses, with benchmark indexes down around one percent on the day. The dollar extended its gains versus the euro.
U.S. government bonds, which abhor inflation and perform better during slow economic times, gave up some ground after the ISM release.
U.S. construction spending fell 0.4 percent in April on continued deterioration in the residential sector, but outside of home building private spending rose for the third straight month.
Economists polled by Reuters ahead of the Commerce Department's report were expecting a 0.6 percent decrease in construction spending after a 0.6 percent decrease in March that was first reported as a much bigger 1.1 percent decline.
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