By Eileen Alt Powell
The Associated Press

NEW YORK - In the first sign that the U.S. economy is coming out of a recent stall, the manufacturing sector expanded at a respectable rate in July on strong orders and higher production rates.

The Institute for Supply Management Monday said its manufacturing index registered 62.0 last month, up from 61.1 in June. It was the 14th consecutive monthly increase and was in line with the consensus forecast of analysts.

An index reading above 50 indicates expansion, while one below 50 indicates that manufacturing activity is contracting. The gauge has been above 50 since June of last year.

In Washington, meanwhile, the Commerce Department reported that construction spending slipped 0.3 percent in June to a seasonally adjusted $985.2 billion after expanding a revised 0.1 percent in May. The industry is particularly sensitive to interest rates, which have been on the rise since spring.

The construction report was weaker than economists expected and represented another sign that the economy hit a rough patch early in the summer.

Stocks ended the day higher as investors gave more weight to the economic news than security concerns. The Dow Jones Industrial Average closed up 39.45, or 0.4 percent, at 10,179.16. The Standard & Poor's 500 Index rose 4.90, or 0.4 percent, to 1106.62, while the Nasdaq Composite Index advanced 4.73, or 0.3 percent, to 1892.09.

The construction figures were further evidence that the nation's economic expansion appeared to slow at the end of the second quarter as interest rates rose and fuel costs climbed higher. The manufacturing survey suggests that growth is picking up again in the third quarter.

"July represents a good start for the third quarter, and the outlook continues to be very encouraging as new orders and production accelerated during the month," Norbert J. Ore, chairman of the institute's survey committee, said in a statement accompanying the report.

Thomas Duesterberg, president and chief executive of the Manufacturers Alliance/MAPI in Arlington, Va., called the report "pretty unabashedly positive."

He said the report indicated "that the leadership of the economy is passing from the consumer and government side to the industrial side." The Manufacturers Alliance/MAPI trade group expects overall economic growth of more than 4.5 percent at an annual rate in the second half of the year, up from 3 percent in the April-June quarter.

"Manufacturing will be an engine," Duesterberg said, projecting manufacturing growth of 7.1 percent in the third quarter and 7.8 percent in the fourth.

Rod Smyth, chief investment strategist at Wachovia Securities, said in a research note that the combination of higher business spending plus strong corporate profits "continue to support moderate job growth." That, in turn, should boost consumer spending in coming quarters, he said.

The Institute for Supply Management, which is based in Tempe, Ariz., said in its report that its new orders index registered 64.7 in July compared with 60.0 in June. The production index advanced to 66.1 last month from 63.2 the month before.

Employment, supplier deliveries and inventories all expanded more slowly in July than June, as did prices. But the price index reading of 77.0 in July, compared with 81.0 in June, remained "an issue," the institute said.

"Energy prices remain a major concern for purchasers, as prices are at or near record highs," the institute said.

Ore said that the overall index reading has been above 60 for nine consecutive months.

"This is the longest period of growth above 60 percent since the 12-month period of July 1972 through June 1973," Ore said.