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A measure of U.S. manufacturing was little changed in August as gains in exports helped offset falling domestic demand.

The Institute for Supply Management's factory index slipped to 49.9 from 50.0, the dividing line between expansion and contraction, in July. A Commerce Department report showed construction spending fell more than forecast in July, with residential building reaching its lowest level in seven years.

The boost from exports, which have kept the economy afloat amid the housing slump and fading impact of federal tax rebates, may recede as economies in Europe and Japan verge on recessions. Stephen Roach, Morgan Stanley's Asia chairman, said today that the global economic downturn has only just begun.

“Demand is weak and will continue to weaken,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York, who forecast the ISM index would drop to 49.8. “It's not a deep recession but a recession nonetheless.''

Stocks reversed early gains, while Treasuries rallied. The Standard & Poor's 500 Stock Index declined 0.4 percent to close at 1,277.58 in New York. Benchmark 10-year notes yielded 3.73 percent, compared with 3.82 percent at the close last week.

The ISM index was projected to remain unchanged at 50, according to the median of 72 economists' forecasts in a Bloomberg News survey.

`Rather Flat'

“Manufacturing has been rather flat,'' said Norbert Ore, chairman of the ISM survey, in a conference call from Atlanta. “The industries that are doing well are not that strong, and the ones that are declining aren't declining that much.''

The purchasing managers' gauge of new orders for factories increased to 48.3 from 45 the prior month, when it reached its lowest level since October 2001. The production measure dropped to 52.1 from 52.9.

Orders from overseas have helped some companies withstand slower U.S. sales. The group's export gauge jumped to 57 from 54 the prior month. With the euro-region and Japanese economies contracting last quarter, and the dollar rallying since mid- July, that may change.

“We're in the early stages of the downturn in the U.S. and global business cycle,'' Roach said in an interview with Bloomberg Television in New York today.

The employment index dropped to 49.7 from 51.9 in July, a further sign of weakness in factory employment. Ford Motor Co., the second-largest U.S paydayloan. automaker, last month said it would lay off 300 workers at a Michigan engine factory as demand dwindles for vehicles equipped with V-8 engines because of gasoline prices.

Price Gauge

The purchasing managers' index of prices paid dropped to 77 from 88.5.

The Commerce Department said construction declined 0.6 percent in July after a revised 0.3 percent gain that initially was reported as a 0.4 percent drop. Private residential projects declined 2.3 percent in July to the lowest level since March 2001, the start of the country's last official recession.

President George W. Bush has credited the $168 billion fiscal stimulus enacted in February with helping the U.S. to ward off a recession. Even as economists project the economic downturn will worsen by year-end, he said Aug. 30 in his weekly radio address that conditions are “beginning to improve.''

By contrast, about three out of four Americans say the economy is in bad shape, a Bloomberg/Los Angeles Times poll showed last month. In June, that proportion reached 82 percent, the worst assessment in 15 years.

Growth Projections

The economy will grow at an average 0.7 percent pace in the second half of the year, economists surveyed by Bloomberg News forecast in the first week of August. Last week, the government reported the economy grew at a better-than-forecast 3.3 percent annual rate in the second quarter, following 0.9 percent in the first three months of the year.

The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The smaller gap added 3.1 percentage points to growth, the most since 1980. That is likely to diminish as overseas economies slow and the dollar strengthens.

A slump in the auto industry has been at the forefront of the weakening in domestic manufacturing. Sales of cars and light trucks in July slid to a 12.5 million annual rate, the lowest level since 1993, according to industry figures.

General Motors Corp. Chief Executive Officer Rick Wagoner said Aug. 16 he's not yet seeing signs of a recovery in the U.S. economy or in vehicle sales.

The sluggish economy helped push GM, the world's largest automaker, to a $15.5 billion loss in the second quarter. “It still feels to me like we're in it,'' Wagoner said of the economic slowdown.

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