Manufacturing activity increased modestly in June

Manufacturing picked up modestly in June, as booming home and vehicle sales bolstered key industries.

A closely-followed index of factory activity rose to 53.5 from 52.8 in May, the Institute for Supply Management (ISM) said Wednesday, above the 53.2 expected by economists surveyed by Bloomberg.

The supply-chain trade group surveys of manufacturing supply managers monthly on topics like employment and trade. A reading above 50 indicates that the sector is expanding, while below 50 means it's shrinking, with an average of 54.9 for the past year.

Continuing May's trend, the index indicates a moderate jump in manufacturing. Budding growth in the housing sector boosting cabinet and furniture makers. And strong vehicle sales supported metal producers.

Measures of orders and employment both rose to six-month highs. An index of new orders increased to 56 from 55.8 in May. The employment index also climbed to 55.5 from 51.7 in May, indicatingmore hires in manufacturing and boding well for Thursday's jobs report..

While production is still expanding, it grew at a slightly slower rate.The index clocked in at 54, down from 54.5 in May.

Overall, growth in manufacturing remains muted as suppliers recover from a rallying dollar that has hurt exports and a pullback in oil drilling.

"Comments from the panel indicate mostly stable to improving business conditions, with the notable exception relating to the oil and gas markets," wrote Bradley Holcomb, chair of the ISM manufacturing survey committee.

The dollar has strengthened since last summer amid anticipation that the Federal Reserve will raise US interest rates later this year, combined with low rates in weaker economies overseas. That has made U.S. exports more expensive, and presented a challenge for multinational companies converting profits from euros to dollars.

While industries like furniture and textiles appear to be bouncing back, the index for new export orders showed a contraction, to 49.5 from 50 in May.

" Growth is being led by domestic demand," wrote Jim O'Sullivan, economist at research firm High Frequency Economics in a research note.

Meanwhile, the decline in oil prices led energy companies in the U.S. to cut back on purchases of manufactured goods, such as steel.

Another sector that took an unexpected hit was food and beverages, with egg prices soaring for the second straight month in response to avian flu outbreaks.

Despite their recent struggles, manufacturers aren't holding back investments in upgraded facilities, by one government estimate.

Construction spending jumped at a seasonally adjusted annual rate of 0.8% in May, the Census Bureau said Wednesday in a separate report. That beat economists' estimates of a 0.5% increase, according to a Bloomberg survey on the barometer of housing and business investment.

It was led by private nonresidential construction, which climbed 1.5% month-over-month. Within that category, manufacturing facility construction was at the head of the pack, rising 6.2% for the month.