U.S. markets open in 5 minutes

U.S. factory growth hits fastest pace in 2-1/2 years

Workers assemble Motorola phones at the Flextronics plant that will be building the new Motorola smart phone "MotoX" in Fort Worth, Texas September 10, 2013. REUTERS/Mike Stone

By Rodrigo Campos

NEW YORK (Reuters) - The U.S. manufacturing sector expanded at its fastest pace in more than two years in October, according to an industry report, signaling a strong start to fourth-quarter factory activity despite a government shutdown during the first half of the month.

The Institute for Supply Management said on Friday its index of national factory activity rose to 56.4 in October, its best showing since April 2011, handily beating expectations of a slight slowdown in the growth rate.

Last month was the fifth in a row of quicker growth in the goods-producing sector, according to ISM's data.

"It certainly was a surprise, and a good one. We don't get that many of those on the data stream of late," said Art Hogan, managing director at Lazard Capital Markets in New York.

"This was supposed to be a government shutdown-affected number, and it certainly didn't show that."

Analysts expected weak economic data readings after a political stalemate in Washington forced a partial federal government shutdown through the first 16 days of October.

A separate reading from financial data firm Markit cast some doubt on the strength of factory activity growth. Markit said its final U.S. Manufacturing Purchasing Managers Index stood at 51.8 last month, beating the preliminary October reading but notching the worst final showing since October 2012.

The two surveys use several different methodologies, including one related to seasonal adjustment. Both figures indicated expansion in the manufacturing sector.

The ISM's employment component did show some weakness as it slipped to 53.2 after hitting a 15-month high of 55.4 in September.

Job growth in the broader U.S. economy was tepid in September, and economists polled by Reuters expect a government report due on November 8 to show hiring slowed further in October.

Treasuries prices fell after the factory data and stayed lower through the day. The U.S. dollar extended gains against both the euro and the yen. On Wall Street, stocks wavered but were slightly higher in afternoon trading, not far from record highs.

"It's hard to have a takeaway for the markets because we're at a point in time where we have to take all the data with a bit of a grain of salt. Some of it is old, some may not be affected by the shutdown yet," Hogan said.

Beyond factory activity, the government shutdown did appear to dampen consumers' appetite for new cars last month. Seven of the top eight automakers reporting monthly sales on Friday missed analysts' expectations.

Friday's factory figures came a day after a report showed business activity in the U.S. Midwest surged past expectations in October as new orders hit their highest level since 2004. Weekly unemployment claims also fell, in welcome news for the nation's battered labor market.

Still, the mixed results in the two factory readings on Friday underscored lingering uncertainty over the state of the world's largest economy. Earlier this week the Federal Reserve suggested it still sees a need for stimulus and maintained its $85 billion per month bond-buying program to prop up the economy.

(Reporting by Steven C. Johnson, Luciana Lopez, writing by Rodrigo Campos; Editing by Meredith Mazzilli)