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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. factory activity contracted further in November amid a slump in new orders while construction spending unexpectedly fell, offering cautionary notes on an economy that had recently shown signs of growing at a moderate pace.

The reports on Monday came on the heels of upbeat October data on the goods trade deficit, housing and manufacturing that led economists to boost their gross domestic product estimates for the fourth quarter.

The Institute for Supply Management (ISM) said its index of national factory activity dropped 0.2 point to a reading of 48.1 last month. A reading below 50 indicates contraction in the manufacturing sector, which accounts for 11% of the U.S. economy.

The ISM index needs to break below the 42.9 level to signal a recession in the broader economy. Economists polled by Reuters had forecast the index rising to 49.2 in November from 48.3 in the prior month.

Though the ISM said business sentiment had improved, likely as the United States and China inch towards a partial trade deal, November's reading marked the fourth straight month that the index remained below the 50 threshold.

Continued contraction in manufacturing could put the Federal Reserve in a difficult policy position. The U.S. central bank in October cut interest rates for the third time this year and signaled a pause in the easing cycle that started in July when it reduced borrowing costs for the first time since 2008.

Economists say without a complete trade deal, manufacturing is unlikely to rebound much and the sector could remain under pressure, with President Donald Trump on Monday restoring tariffs on steel and aluminum imports from Brazil and Argentina.

Manufacturing is also facing challenges from a domestic inventory bloat, slowing profit growth and weak overseas demand.

The ISM's forward-looking new orders sub-index fell to a reading of 47.2 last month from 49.1 in October. A measure of export orders dropped 2.5 points to a reading of 47.9. The survey's factory employment index fell 1.1 points to a reading of 46.6 last month.

The dollar was trading down against a basket of currencies, while U.S. Treasury prices rose. Stocks on Wall Street fell.

WEAK CONSTRUCTION

In a separate report on Monday, the Commerce Department said construction spending dropped 0.8% as investment in private projects tumbled to its lowest level in three years. Data for September was revised to show construction outlays declining 0.3% instead of rising 0.5% as previously reported.

Economists had forecast construction spending gaining 0.4% in October. Construction spending increased 1.1% on a year-on-year basis in October.

In October, spending on private construction projects dropped 1.0% to $956.3 billion, the lowest level since October 2016, after declining 1.1% in September. It was held down by a 0.9% decrease in spending on private residential projects. Outlays on residential construction dropped 1.1% in September.

The second straight monthly drop in residential construction is despite lower mortgage rates.

Mortgage rates have declined as the Federal Reserve has cut interest rates three times this year, softening the hit on the economy from a 16-month trade war between the United States and China, as well as slowing global growth.

Spending on private nonresidential structures, which includes manufacturing and power plants, plunged 1.2% in October to the lowest level since January 2018.

Investment in private nonresidential structures fell 1.0% in September. Outlays on private nonresidential structures have been depressed by a manufacturing downturn due to trade tensions and cheaper energy products.

Investment in nonresidential construction fell at its steepest pace in nearly four years in the third quarter. That contributed to business investment contracting for a second straight quarter.

Spending on public construction projects slipped 0.2% after jumping 1.9% in September. Spending on state and local government construction projects fell 0.3%. It surged 2.0% in September.

Outlays on federal government construction projects increased 0.6% in October to the highest level since May 2013. That followed a 0.7% rise in September.


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