WASHINGTON -- The manufacturing sector continued to strengthen in July, according to a purchasing managers report issued yesterday, but separate Commerce Department reports showed slim gains in personal income and construction spending in June.

The mixed batch of statistics was typical of recent indicators that analysts have seized on to argue either that the U.S. economy is slowing or that it is still moving ahead strongly. On Friday, the department estimated that U.S. output rose at an annual rate of 3.7% in the second quarter, but much of the gain was the result of swelling business inventories.

"I still think we see the seeds of moderation, but not necessarily in manufacturing output," said Cynthia Latta, senior financial economist for DRI/McGraw-Hill Inc.

The National Association of Purchasing Management said its index edged up to 57.8% from 57.5% in June, signaling that manufacturing strengthened for the 11th straight month. A reading above 50% is generally taken to indicate an expanding industrial sector.

"The underlying tone of manufacturing production is very solid," said David Orr, chief economist for First Union National Bank, in Charlotte, N.C.

Orr said he believes the economy is making a transition from one led by consumer spending and housing construction to one led by business investment and exports. People who buy bonds based on the view that the economy is cooling "will be unpleasantly surprised," he predicted.

The production index of the purchasing managers report jumped to 61% from 59.8% in June on strong gains in a variety of industries, In addition, the employment index advanced to 51.8% from 49.1% in June, with eight industries reporting stepped-up hiring.

The new orders index remained strong, rising to 63.3% from 62.6% in June. And price pressures for companies continued, the purchasing managers said. The group's price index declined to 73.1% from 73.5% in June but remained at the second highest level since August, 1988.

Meanwhile, the Commerce Department reported that personal income inched up 0.1% in June, while household spending gained 0.4%. In a separate report, the department said construction spending grew only 0.2% as builders' outlays for single-family homes fell for the first time in 14 months.

Economists said the reports provided additional evidence that growth in the economy is likely to slow to a more sustainable level in the second half of this year, possibly to a rate of 3% or less. "I think this is the start of a new trend," said Dan Seto, an economist with Nikko Securities Company International.

Seto and other analysts predicted that consumer spending will rebound in the third quarter, but said slow income growth coupled with a low personal savings rate imply that consumer spending will not rebound by much.

"We have another piece of evidence that consumer spending will stay at a more sustainable level in the second half of the year," said Mark Zandi. chief economist of Regional Financial Associates.

The small rise of 0.1% in personal income seemed surprising because job creation has been strong lately. But analysts said that is not a contradiction because June's employment report showed that the average workweek fell slightly, dampening the income gains generated as people got new jobs.

The 0.2% gain in construction spending was less than half the 0.5% gain expected by most economists. Both private and public construction spending gained only 0.2%. Meanwhile, residential building fell 0.2%, led by a 0.5% drop in single-family homes.

The report shows that higher interest rates are beginning to slow rate-sensitive sectors of the economy, such as housing, economists said. "Housing probably peaked at the end of last year but I don't see it going down the drain this year," said Josh Feinman, global markets economist of the Bankers Trust Co.

Analysts were generally divided over whether construction spending would decline a bit or muster further small gains through the end of the year. Zandi predicted that residential building will continue to drift downward in the coming months because of higher interest rates. On the other hand, commercial construction could show some modest strength for a change in the coming months, Zandi said. But other economists predicted that commercial outlays will weaken along with residential outlays.

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