By Lucia Mutikani
WASHINGTON (Reuters) - U.S. manufacturing activity slowed in July amid signs that a robust economy and import tariffs were putting pressure on the supply chain, which could hurt production in the long term.
Other data on Wednesday showed private employers stepped up hiring in July, suggesting the labor market remained robust at the start of the third quarter.
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The Institute for Supply Management (ISM) said its index of national factory activity fell to a reading of 58.1 last month from 60.2 in June. A reading above 50 in the ISM index indicates an expansion in manufacturing, which accounts for about 12 percent of the U.S. economy.
"Demand remains robust, but the nation's employment resources and supply chains continue to struggle," said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee.
"Respondents are again overwhelmingly concerned about how tariff-related activity, including reciprocal tariffs, will continue to affect their business."
President Donald Trump's "America First" trade policy has left the United States embroiled in tit-for-tat tariffs with its major trade partners, including China, Canada, Mexico and the European Union. Trump claims the United States is being taken advantage of by its trade partners.
Analysts have warned that import duties could disrupt supply chains, undercut business investment and potentially put a brake on strong economic growth. The signs of rising capacity constraints could draw the attention of the Federal Reserve, which is wrapping up a two-day policy meeting on Wednesday.
The U.S. central bank is expected to leave interest rates unchanged on Wednesday after increasing borrowing costs in June for the second time this year. The Fed has forecast two more rate hikes by the end of 2018.
While the ISM's supplier deliveries sub-index dropped 6.1 points to 62.1 last month, the reading remained high after racing to a 14-year high of 68.2 in June. Economists say the trade tensions, the robust economy, marked by labor shortages and strong domestic demand, are behind the delivery delays.
The economy grew at a 4.1 percent annualized rate in the second quarter, the fastest in nearly four years and double the 2.2 percent pace logged in the January-March period. The labor market is considered to be near or at full employment, with the jobless rate at 4.0 percent.
SOLID JOB GAINS
Separately, the ADP National Employment Report showed private payrolls surged by 219,000 jobs in July after rising by 181,000 in June. Economists polled by Reuters had forecast that private payrolls would increase by 185,000 jobs last month.
The ADP report is jointly developed with Moody's Analytics. While it is not a good predictor of the private payrolls component of the government's more comprehensive employment report, the report nonetheless supported expectations for solid job gains in July.
According to a Reuters survey of economists, nonfarm payrolls likely increased by 190,000 jobs in July after advancing by 213,000 positions in June. The unemployment rate is forecast falling one-tenth of a percentage point to 3.9 percent in July. Job growth averaged 215,000 per month in the first half of this year.
Prices of U.S. Treasuries were trading lower on Wednesday while U.S. stocks were higher. The dollar <.DXY> rose against a basket of currencies. A third report from the Commerce Department on Wednesday showed construction spending recorded its biggest drop in more than a year in June as investment in both private and public projects fell, but spending for the prior months was revised sharply higher.
Construction spending fell 1.1 percent, the largest decline since April 2017. Data for May was revised up to show construction outlays rising 1.3 percent instead of the previously reported 0.4 percent gain. April's outlays increased 1.7 percent instead of the previously estimated 0.9 percent.
Economists polled by Reuters had forecast that construction spending would advance 0.3 percent in June. Construction spending accelerated 6.1 percent on a year-on-year basis.
Spending on private residential projects fell 0.5 percent in June following a 1.3 percent increase in May. Homebuilding has been slowing, with builders citing rising material costs as well as persistent land and labor shortages. Residential investment contracted in the first half of the year.
Spending on private nonresidential structures slipped 0.3 percent in June after gaining 0.2 percent in the prior month. Overall, outlays on private construction projects fell 0.4 percent in June after increasing 0.9 percent in May.
Investment in public construction projects tumbled 3.5 percent, the biggest drop since March 2013, after surging 3.0 percent in May. Spending on federal government construction projects declined 3.1 percent. That followed a 0.9 percent increase in May.
State and local government construction outlays plunged 3.5 percent in June, also the largest drop since March 2013, after jumping 3.1 percent in the prior month.
(Reporting by Lucia Mutikani; Editing by Paul Simao)