Factories Gear Up, ISM Index Shows; Housing Still Weak

National factory activity rebounded in April, surprising economists and inspiring hopes for an end to a six-month manufacturing slump.

But the latest housing market troubles kept Wall Street from cheering. The Institute for Supply Management's index jumped to an 11-month high of 54.7 from March's 50.9. Wall Street expected 51.

"It was certainly stronger than anyone was looking for, and I think the details were even more impressive," said Scott Brown, chief economist at Raymond James.

The orders index hit a 14-month high of 58.5 vs. 51.6 in April. Production rose to 57.3 vs. 53.

The employment and order backlog indexes moved back above the neutral 50 level.

The report suggests that the factory sector won't be a further drag on sluggish U.S. growth.

"It shows the economy is still healthy outside of housing. The manufacturing sector went through a soft patch late last year and the early part of this year, but it's stabilizing and actually looking a little better," said Gary Thayer, chief economist at A.G. Edwards.

It now appears too-large inventories that hampered manufacturers for the past two quarters mostly have been pared down.

An end to overstocking plus some signs of improved business spending could help in the months to come, analysts say.

The prices paid index jumped to its highest level since last August, reflecting spiking energy costs. Inflationary pressures from the factory sector will be one factor keeping the Federal Reserve from cutting interest rates any time soon.

"The Fed's still going to be cautious on policy and wait it out, and not change policy until they get further evidence that inflation has abated," Thayer said.

Also, exports got a bit of help from the weaker dollar, according to Tony Crescenzi, chief bond market strategist at Miller Tabak. The ISM's export index edged up to 57 from 55.5.

Automakers remain one of the factory sector's weakest links. Ford, which had warned of a "terrible" April, said U.S. sales fell 13% vs. a year earlier amid soaring gasoline prices. GM's slid 9.5%. Even Toyota saw a 4.3% sales drop.

Ford announced new incentives, joining GM's recent moves.

Wall Street largely ignored the upbeat factory data because of the latest gloomy news on housing.

Despite better weather, the pending home sales index fell 4.9% in March to a four-year low, the National Association of Realtors said.

Economists expected the index, which gauges the number of contract signings, to fall just 0.1%. The big drop suggests existing-home sales will continue to slide.

That follows Monday's news of lackluster construction spending due to plunging home building.

Stocks sold off on the pending-home sales data, but rallied as oil prices declined late. The Dow rose 0.6% and the Nasdaq 0.4%.

The 10-year Treasury yield rose 1 basis point 15 4.64%.

Looking ahead, traders will be eyeing Thursday's report on first-quarter productivity before turning to Friday's April jobs report.