Manufacturers are shedding jobs and slashing outlays on their facilities, data Monday showed, weakening the argument for the Federal Reserve to scale back stimulus soon.
The Institute for Supply Management's factory gauge rose to 50.9 in June from 49 in May, meaning activity swung back to expansion from contraction. Analysts expected 50.6.
Production, orders and exports improved, but employment slid into negative territory for the first time since September 2009. Price pressures also worsened, and backlogs shrank at a faster pace.
"The Fed needs to see jobs and rising output to generate confidence in the recovery and pull back the pace of asset purchases," said Eric Green, head of rates and currency research at TD Securities, in a client note.
"The ISM does little to generate that confidence. Bond markets will therefore interpret this as a reason to lean against a premature tapering by the Fed.
U.S. stock indexes rallied sharply, though gains faded somewhat. The Labor Department's June jobs report Friday will offer a stronger signal on Fed policy.
Commentary from purchasing managers polled by ISM also revealed lingering caution, despite the pickup in the overall index.
"Slow growth continues to choke the recovery," said one in the chemical sector. "We are not out of the woods yet by any stretch of the imagination.
While U.S. manufacturing is mixed, it has performed better than factories around the world. Gauges in China pointed to further softening last month, as did those for South Korea, Indonesia, Taiwan and Vietnam.
The final reading for June eurozone manufacturing activity was 0.1 point better than the initial estimate, though it remains well in negative territory.
But a survey of large Japanese manufacturers swung to optimism in Q2 after nearly two years of pessimism, helped by the Bank of Japan's aggressive monetary stimulus.
Like the ISM index, the May U.S. construction spending report pointed to overall growth but had more negative details.
Outlays rose 0.5%, missing forecasts but accelerating from April's 0.1% monthly uptick. Public sector dollars rebounded 1.8% from a 6-1/2 year low. Private residential spending grew 1.2%.
But private nonresidential outlays fell 1.4%, as manufacturers spent 8.1% less. The yearly pace of factory construction also turned negative for the first time since mid-2011.
Commercial construction, which includes retail, wholesale and some services, dropped 2.5% from April. Office construction eased 0.6%. Single-family home spending decelerated for the third straight month.
Mortgage rates started climbing in May and have spiked to near-two-year highs in recent weeks. Homebuilders say the higher rates haven't hurt sales.