By Lucia Mutikani
WASHINGTON (Reuters) - U.S. manufacturing activity accelerated to a nearly two-year high in August aided by a surge in new orders, but employment at factories continued to lag amid safety restrictions intended to slow the spread of COVID-19.
The upbeat report from the Institute for Supply Management (ISM) strengthened expectations for a sharp rebound in economic activity this quarter, though the improvement in manufacturing remained uneven as the coronavirus pandemic boosted demand for goods like home electronics at the expense of heavy-duty equipment like machinery and aircraft.
The ISM described sentiment as "generally optimistic, though to a lesser degree compared to July." The ISM said its index of national factory activity increased to a reading of 56.0 last month from 54.2 in July. That was the highest level since November 2018 and marked three straight months of growth.
A reading above 50 indicates expansion in manufacturing, which accounts for 11% of the U.S. economy. Economists polled by Reuters had forecast the index would rise to 54.5 in August.
Manufacturers of transportation equipment said "airline industry continues to be under great pressure." Makers of machinery said "capital equipment new orders have slowed again."
In contrast, manufacturers of electrical equipment, appliances and components reported "strong demand from existing and new customers." Similar sentiments were echoed by makers of chemical, wood and fabricated metal products.
Manufacturing is also picking up across the world. In China, factory activity expanded at the fastest clip in nearly a decade in August, while it remained on a recovery path in the euro zone.
Stocks on Wall Street rallied on the data. The dollar was steady against a basket of currencies. U.S. Treasury prices fell.
STRONG ORDER GROWTH
The ISM's forward-looking new orders sub-index increased to a reading of 67.6 in August from 61.5 in July. The survey's measure of order backlogs at factories accelerated as did orders for exports.
Though factory employment continued to improve last month, it remained in contraction territory. The ISM's manufacturing employment measure rose to a reading of 46.4 from 44.3 in July. According to the ISM "companies and suppliers operated in reconfigured factories, with limited labor application due to safety restrictions."
Factory employment was already in decline before the coronavirus crisis because of the Trump administration's trade war with China. Its struggle to rebound even as orders received by factories are rising fits in with economists' views that the labor market is losing steam after being boosted by the reopening of businesses in May.
The government's closely followed employment report to be released on Friday is expected to show 1.4 million jobs created in August after 1.763 million were added in July, according to a Reuters survey of economists. That would leave nonfarm payrolls about 11.5 million below their pre-pandemic level.
A separate report from the Commerce Department on Tuesday showed construction spending edged up 0.1% in July after falling 0.5% in June. Economists had forecast construction spending rebounding 1.0% in July. Construction spending dipped 0.1% on a year-on-year basis.
Spending on private construction projects advanced 0.6%, boosted by investment in homebuilding amid record-low mortgage rates. Spending on residential projects surged 2.1%, eclipsing a 1.0% drop in outlays on nonresidential construction projects such as manufacturing and power plants.
Spending on public construction projects tumbled 1.3%.
(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)