Oct. 2 (Bloomberg) -- Manufacturing in the U.S. last month expanded less than economists forecast, suggesting the housing slump is extending its reach to other parts of the economy.

The Institute for Supply Management's manufacturing index dropped to 52.9 from 54.5 in the prior month. A reading higher than 50 signals expansion. The index averaged 55.2 this year through August.

The decrease raises the risk that the economy will slow more than forecast heading into 2007 and shows the Federal Reserve was right in ending two years of interest-rate increases in June. Corporate leaders, whose confidence has been rattled by a weakening real estate market and slower consumer spending, are reluctant to buy new equipment.

``The demand for manufactured products has weakened with slower consumer spending.'' Steven Wood, president of Insight Economics LLC in Danville, California, said before the report. ``Although factory activity is still growing moderately, it is at a slower pace than earlier this year and in 2005.''

The index was expected to fall to 53.5, based on the median of 64 forecasts in a Bloomberg News survey. Estimates ranged from 51.5 to 57.5. The ISM, based in Tempe, Arizona, surveys more than 400 companies in 20 industries including clothing, printing, transportation, furniture and plastics to compile its index.

To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net.

Last Updated: October 2, 2006 10:05 EDT