Nov. 1 (Bloomberg) -- Manufacturing in the U.S. slowed more than forecast in October as factories received fewer orders and production contracted, an industry report showed today.

The Institute for Supply Management's factory index fell to 50.9, the lowest in seven months, from 52 in September. Readings greater than 50 signal expansion.

Manufacturing is on the verge of stalling as the deepening housing slump weakens demand for construction equipment, furniture and appliances, economists said. Overseas growth and a weaker dollar are boosting exports at firms including DuPont Co. and Agco Corp., helping avert a broader factory slump.

``Manufacturers that serve the housing market are seeing some difficulties,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who forecast the index would fall to 51. ``It's slowing down because underlying growth in demand is rather sluggish.''

Economists expected the Tempe, Arizona-based ISM's manufacturing index to drop to 51.5, according to the median of 81 projections in a Bloomberg News survey. Estimates ranged from 50 to 53.

The group's gauge of prices paid rose to 63 from 59, matching the survey median.

A separate report today showed consumer spending rose less than forecast in September. The 0.3 percent increase followed a revised 0.5 percent gain in August that was smaller than previously reported, the Commerce Department said in Washington. Economists forecast spending would increase 0.4 percent.

Market Reaction

U.S. Treasury securities extended earlier gains following the reports and stock process dropped. The yield on the benchmark 10-year note fell to 4.36 percent at 10:19 a.m. in New York, from 4.47 percent late yesterday.

The ISM's new orders index decreased to 52.5 from 53.4, and the production index dropped to 49.6, contracting for the first time since January, from 54.6.

The supplier delivery gauge, a measure of the time it takes to receive goods, fell to 50.6 from 51.9 the prior month. The measure of orders waiting to be filled dropped to 46 from 51.

The inventory index rose to 47.2 from 41.6. A figure below 50 means manufacturers are reducing stockpiles. A gauge of export orders rose to 57 from 54.5.

Fed policy makers, who cut the benchmark interest rate yesterday for a second time in as many months, said the reductions ``should help forestall some of the adverse effects on the broader economy'' from the disruptions in financial markets, according to their statement.

The outlook is ``uncertain'' even after ``solid'' growth last quarter, policy makers said. ``Upside risks to inflation roughly balance the downside risks to growth.''

Third-Quarter Growth

Economic growth unexpectedly accelerated in the third quarter as gains in exports, consumer spending and business investment made up for another plunge in home construction, Commerce said yesterday. The economy grew at a 3.9 percent pace from July through September.

Companies expanded stockpiles at a $15.7 billion rate, adding 0.4 percentage point to growth. While homebuilders and automobile companies are still working off a glut of inventory, firms in some industries are expanding production, helping prevent a collapse in manufacturing, economists said.

A surge in exports is helping cushion factories from a slowdown in domestic demand as the worst housing slump in 16 years lingers. Defaults on subprime mortgage loans and a credit limits suggest the real-estate recession will worsen, economists said.

International Orders

DuPont, the third-largest U.S. chemical maker, said Oct. 23 that third-quarter sales outside the U.S. rose 11 percent, boosting profit and compensating for weakness in U.S. housing and automotive markets.

``We have no expectations of an uptick in demand from the U.S. residential housing market this quarter or even next year,'' DuPont Chief Executive Officer Charles O. Holliday Jr. said on a conference call with investors and analysts. Still, for 2008, ``we're assuming global GDP growth at about the same rate as 2007, strong agricultural business and no U.S. recession.''

Firms that remain optimistic include Agco, the second- largest U.S. maker of farm equipment, which raised its full-year earnings forecast this week. The Duluth, Georgia-based company also reported a 14-fold surge in third-quarter profit on sales of tractors and combines in South America.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: November 1, 2007 10:22 EDT