NY factory index contracts for third month

Manufacturing led the U.S. recovery in the past couple of years, even though it only represents about 12 percent of overall economic activity, but growth in the sector has slowed sharply in recent months.

The survey of manufacturing plants in New York state is one of the earliest regional guideposts to U.S. factory conditions and analysts said it boded poorly for the larger national survey due at the beginning of September.

The general business conditions index fell to minus 7.72 from minus 3.76 the month before, the New York Federal Reserve's Empire State index showed on Monday. Economists polled by Reuters had expected a reading of zero.

"While this is just the first of regional indicators, it does a fairly good job of predicting what the others will do," said Millan Mulraine, senior U.S. macroeconomic strategist at TD Securities.

"We're still somewhat far off from getting into a double dip recession, but it suggests sluggish growth for the next quarter," he added.

New orders fell to their lowest level since November 2010, slipping to minus 7.82 from minus 5.45, while inventories fell to minus 7.61 from minus 5.56.

But the employment gauge showed a slight improvement. The index for the number of employees inched up to 3.26 from 1.11 and the average employee work week index rose to minus 2.17 from minus 15.56.

Prices paid eased, falling to 28.26 from 43.33. The index was also at its lowest level since November 2010.

The outlook for the months to come also deteriorated, falling to the lowest level since February 2009. The index of business conditions six months ahead dropped to 8.70 from 32.22.

"This is consistent with the negative tone that has permeated throughout the markets. Clearly we are not starting the new round of manufacturing data on good footing," said Tom Porcelli, chief U.S. economist at RBC Capital Markets.

The dollar hit session lows against the euro and yen following the report, while U.S. Treasuries prices gained slightly.

U.S. stocks brushed off the data to rise more than 1 percent in early trading on acquisition news and hopes European politicians will come up with solutions to the current credit crisis in the region.

HOUSING HEADWINDS

Separate data also showed U.S. homebuilder sentiment remained stuck at historic lows in August, as a glut of distressed homes, tight credit, and economic uncertainty kept new buyers out of the market.

The NAHB/Wells Fargo Housing Market index held at 15 in August, on target with economists' expectations.

Readings below 50 mean more builders view market conditions as poor than favorable. The index has hovered at historic lows between 14 and 22 since the start of 2008.

The U.S.'s second largest home improvement retailer, Lowe's Cos Inc reported weaker-than-expected quarterly sales and cut its fiscal-year outlook for the second time in three months on Monday as homeowners put off big renovations in an anemic U.S. economy.

"Despite some recovery in our seasonal business, our performance for the quarter fell short of our expectations," said Robert Niblock, Lowe's chairman, president and CEO.

Many U.S. homeowners have been hesitant to spend on expensive projects as housing prices fall and the economy shows few signs of a stable recovery.

In other data on Monday, foreigners unloaded U.S. assets in June for a second straight month and were net sellers of Treasuries for the first time in more than two years as a rancorous political debate over the nation's debt raised concerns about U.S. credit quality.

Treasuries suffered a net outflow of $4.5 billion, the first since May 2009, but China, the largest foreign U.S. creditor, increased Treasury holdings by $5.7 billion to $1.166 trillion.

(Reporting by Leah Schnurr; Additional reporting by Richard Leong and Alexandra Alper; Editing by Andrea Ricci)