June 2 (Bloomberg) -- Manufacturing in the U.S. contracted less than forecast in May, easing concern the economic slump will intensify.

The Institute for Supply Management's factory index rose to 49.6 from 48.6 in April, the Tempe-Arizona-based group said today. Fifty is the dividing line between contraction and expansion.

Demand from overseas for U.S.-made products is helping to keep factories running even as spending by American consumers and businesses slows. The improvement signals the U.S. may be able to avoid a deep and protracted economic slowdown as the housing slump worsens and food and fuel prices soar.

``Export industries are still seeing very strong orders,'' Brian Bethune, chief U.S. financial economist at Global Insight Inc. in Lexington, Massachusetts, said in a Bloomberg Television interview. ``The overseas markets are growing at very good rates.''

Economists forecast the index would decrease to 48.5 from 48.6 in April, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from 46 to 50.5.

Spending on U.S. construction projects in April fell for a second consecutive month, hurt by weakening homebuilding and less work on offices and highways, the Commerce also reported. The 0.4 percent decrease followed a 0.6 percent drop the prior month that was smaller than previously reported. Private residential building dropped 2.3 percent, the 26th consecutive monthly decline.

Stocks, Treasuries

Stocks maintained losses following the reports and yields on Treasury securities remained down. The yield on the benchmark 10-year note was 4 percent at 10:39 a.m. in New York, compared with 4.06 percent late in the day on May 30.

ISM's gauge of new orders increased to 49.7 from 46.5, while a production measure rose to 51.2 from 49.1, ISM said. A gauge of supplier deliveries fell to 53.7 from 54 the prior month.

Factory production has slowed as sales have weakened. Purchases of cars and light trucks fell to 4.83 million in the first four months of the year, the lowest level since 1995, according to Autodata Corp. in Woodcliff Lake, New Jersey.

Ford Motor Co. has said industry sales may drop to a 15- year low of 14.7 million in 2008. The second-biggest U.S. automaker is slashing production for the rest of the year, mostly for trucks. It also plans to eliminate more jobs.

Consumer spending rose at the slowest pace in more than six years last quarter and is forecast to continue to slow. The slowdown combined with higher raw material costs is prompting companies to limit new investments.

Costs Jump

The ISM's measure of prices paid increased to 87, a four- year high, from 84.5 a month earlier. Economists surveyed by Bloomberg News forecast the gauge would rise to 85.

Slowing demand has made it hard for some companies to raise prices to make up for record energy and food costs.

Rising energy and petrochemical prices will add a record $500 million in costs to Rohm & Haas Co. and prompt the world's biggest maker of acrylic-paint ingredients to shut down some of its plants, Chief Operating Officer Pierre Brondeau said in a May 28 interview.

The company will announce ``in the next couple of weeks'' details of plant closings in North America and Europe, part of a plan to save costs by consolidating production among fewer facilities, he said.

Metals, Fuel

Raw material costs may continue to hurt businesses in coming months. Futures prices for copper, nickel and crude oil have reached records in the last two months and remained near those levels since.

Even with these challenges, businesses are not contracting as deeply as they did in previous recessions. While the Institute for Supply Management's manufacturing index fell to a five-year low of 48.3 in February, it was still well above the 42.1 reading reached in February 2001, a month before the start of the 2001 recession.

A shrinking trade deficit contributed 0.8 percentage point to first-quarter U.S. economic growth, the Commerce Department said May 29. The economy expanded at a 0.9 percent annual pace.

The ISM's export measure climbed to 59.5, the highest since May 2004, from 57.5 in April.

Dell Inc., the world's second-largest personal-computer maker, last week reported a first-quarter profit that exceeded analysts' estimates as sales overseas outstripped U.S. orders for the first time.

Gains Overseas

``The faster-growing end markets clearly are not in North American, but in Asia, Latin America and Eastern Europe,'' Illinois Tool Works Inc. Chief Executive Officer David Speer said May 28 in a presentation at the Sanford C. Bernstein & Co. conference in New York.

Businesses outside North American will generate 60 percent of Illinois Tool Works's revenue in four or five years, compared with about half now, the company said.

The supply managers group's inventory index fell to 48 from 48.1 and its gauge of order backlogs dropped to 46 from 51.5. The employment index increased to 45.5 from 45.4.

The Labor Department is scheduled to release its report on May payrolls on June 6. Manufacturers have lost jobs every month since July 2006.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net.

Last Updated: June 2, 2008 10:41 EDT