By Eric Burroughs NEW YORK (Reuters) - U.S. manufacturing barely grew for a second straight month in August while companies hiked the number of planned layoffs, reports said on Tuesday, stoking worries the economy's already weak recovery may stagnate more in coming months. The Institute for Supply Management said its closely watched index of factory business conditions was unchanged in August at 50.5, posting a seventh month of growth but coming in below expectations for a rise to 51.6. Any reading above 50 signals growth, while one below 50 indicates contraction in a sector that makes up roughly one-sixth of the U.S. economy. In what ISM said was a cause of concern for manufacturers the rest of the year, the new orders index fell in August to 49.7 after having tumbled more than 10 points in July to 50.4. That showed new orders, a key source of future growth and production, declining for the first time since last November and raised the prospect factory output could shrink later in the year. Only eight of 20 industries posted growth on in August, ISM said. "It's not making anybody happy about the economy," said Cary Leahey, senior U.S. economist at Deutsche Bank Securities. Separately, outplacement firm Challenger, Gray & Christmas said that U.S. companies announced 118,067 layoffs in August, a 46 percent jump from the 80,966 job cuts reported a month earlier in a sign that the labor market has yet to improve. U.S. stocks extended losses on the surprisingly weak ISM report, with the Dow Jones industrial average plunging nearly 300 points or 3.3 percent. Safe-haven U.S. Treasuries rallied, pushing yields on benchmark 10-year notes close to four-decade lows below 4 percent. OUTLOOK IN DOUBT After boosting production earlier in the year to replenish depleted inventories, factories have scaled back output and have resisted hiring workers or making investments with the outlook for demand in doubt. The ISM's headline index peaked back in June at 56.2. "We've lost a lot of momentum," said Norbert Ore, chair of the ISM business survey committee, of the decline in new orders. Ore said that another month showing new orders close to the 50 level would indicate "real softness" in the second half of the year, but stressed that the August survey did not by itself suggest a coming contraction in manufacturing. Layoffs continued at factories, extending a trend seen since mid-2000 even as the employment index edged up to 45.8 in August from 45.0 in July. Manufacturers, some of the hardest hit by the recession and tepid recovery, have eliminated 1.8 million jobs in the past two years. According to the Challenger Gray, the current pace of job cuts throughout the economy is on track to make 2002 the second highest year for layoff announcements in the 13 years since it began tracking employment data. Only last year's job cuts were greater. "As companies wait for this elusive rebound, they will continue to eliminate jobs to preserve whatever profits they have been able to achieve," said John Challenger, chief executive of Challenger Gray. In other ISM components, the prices paid index fell sharply in August to 61.5 from 68.3 a month earlier, providing evidence that this year's run-up in prices is abating. Higher prices on raw materials have eaten into some companies' profits. The inventories index rose to 45.2 in August from 41.8, meaning that inventory liquidation slowed on the month even as production was mostly flat at 55.6 from 55.7 a month earlier. The recent decline in the dollar was helping boost exports from U.S. manufacturers, with the export orders index rising to 52.7 from 52.2. The imports index fell to 51.9 from 54.2. STEADY FED The disappointing manufacturing data revived talk of the Federal Reserve possibly cutting interest rates later in the year to prevent the economy from falling back into recession. But central bank policymakers have indicated little inclination to ease monetary policy further, saying benchmark rates at 41-year lows of 1.75 percent should be enough to get the economy back on track. Even with the pullback to near flat levels, the ISM index still suggests economic growth at 2.5 percent to 3.0 percent, according to Ian Shepherdson, an economist at High Frequency Economics. Recent mixed data have made the economy's outlook murky. Personal spending in July grew at the fastest pace in nine months, driven by demand for autos, while durable goods orders excluding defense-related items surged a record 7.3 percent in July. Zero-percent financing and the lowest mortgage rates in a generation have kept home and auto sales at robust levels. But economists fear a persistently weak economy and job market will cause the brisk growth of consumer demand to fade, undermining the economy's key source of strength. But automakers are expected to reveal that big incentives kept luring shoppers in August, with sales of domestically produced autos and trucks expected to come in at a 14.1 million annual pace, down only slightly from July's near-record 14.6 million pace. The Tempe, Ariz.-based ISM bases its manufacturing index on data provided monthly by purchasing executives at over 350 industrial companies and reflects changes in the current month compared with the previous month.
