By Lindsay Dunsmuir
WASHINGTON (Reuters) - U.S. factory activity rose sharply in June to its highest level in almost three years suggesting economic growth in the second quarter gained some steam, while construction spending held steady in May.
The Institute for Supply Management (ISM) said on Monday its index of national factory activity rose to a reading of 57.8 last month, its best performance since August 2014, from 54.9 in May.
A reading above 50 in the ISM index indicates an expansion in manufacturing, which accounts for roughly 12 percent of the overall U.S. economy.
"The ISM index provides further evidence that the prospects for the manufacturing sector remain bright," said Andrew Hunter, an economist at Capital Economics.
The reading adds to encouraging signs that the U.S. economy rebounded strongly in the April-June quarter. Following the data, the Atlanta Federal Reserve raised its forecast for second-quarter GDP to a 3.0 percent annualized rate from its previous forecast of 2.7 percent.
On Friday, the Commerce Department also reported that the U.S. economy grew at a 1.4 percent annual rate in the first quarter, less slowly than previously estimated.
The ISM survey's new orders sub-index rose to 63.5 in June from 59.5 the prior month. A measure of factory employment increased to a reading of 57.2 from 53.5 in May.
According to ISM, comments from those surveyed generally reflected expanding conditions, "with new orders, production, employment, backlog and exports all growing in June compared to May and with supplier deliveries and inventories struggling to keep up with the production pace." Fifteen of the 18 manufacturing industries reported growth in June.
Another survey released on Monday, the Markit Manufacturing Purchasing Managers' Index, gave its lowest reading since last September
The dollar rose to a session high against a basket of currencies after the ISM data, while the yield on the 2-year U.S. Treasury note rose to a more than eight-year high. The Dow Jones Industrial Average hit a record high.
CONSTRUCTION SPENDING MIXED
Meanwhile, U.S. construction spending unexpectedly remained flat in May but federal government outlays on construction projects were the highest in more than four years.
The Commerce Department said on Monday that construction spending in May remained unchanged at $1.23 trillion. Spending in April was revised to show it declining 0.7 percent after a previously reported 1.4 percent fall.
Economists polled by Reuters had forecast construction spending rising 0.3 percent in May. Construction spending increased 4.5 percent from a year ago.
Federal government construction spending jumped 6.4 percent in May to its highest level since January 2013.
The May construction spending release included revisions to data back to January 2015, the Commerce Department said.
In May, private construction spending fell 0.6 percent, the biggest decline since October 2015, after declining 0.2 percent in April. Investment in private residential construction also declined 0.6 percent, the biggest fall since July 2014, after rising 0.5 percent the prior month.
Spending on private nonresidential structures fell 0.7 percent in May, the fifth straight monthly decline.
Investment in public construction projects rose 2.1 percent in May after dropping 2.7 percent in April.
Outlays on state and local government construction projects increased 1.7 percent in May after falling 2.7 percent in April.
(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)