Sept. 4 (Bloomberg) -- Manufacturing in the U.S. cooled in August as factories trimmed orders in anticipation sales would weaken.

The Institute for Supply Management's factory index fell to 52.9, from 53.8 in July. Economists forecast the Tempe, Arizona- based group's measure would decline to 53 and readings higher than 50 signal expansion.

The report, one of the first to show how the mortgage crisis and soaring cost of borrowing last month affected the economy, signals manufacturing is still contributing to growth as demand from overseas grows. The figures may ease concern among Federal Reserve policy makers, who last month said downside risks to growth were mounting.

``At least the manufacturing sector looked pretty robust in August,'' said Julia Coronado, a senior economist at Barclays Capital Inc. in New York, who forecast the index would drop to 53. ``The sector looks pretty healthy overall, basically holding steady. The details actually look fairly reassuring.''

The median forecast was based on a Bloomberg News survey of 81 economists. Estimates ranged from 51 to 56.5. The gauge averaged 53.9 last year.

Spending on construction projects unexpectedly fell in July by the most since January, indicating that the homebuilding slump continued to hold back economic growth at the start of the third quarter. The 0.4 percent decline followed a 0.1 percent gain the prior month, the Commerce Department said today in Washington.

Orders, Exports

The ISM's new orders index fell to 55.3 from 57.5 in July. The group's measure of export orders rose to 57 last month, from 56.5.

Exports are helping companies weather slowing domestic spending. Record sales overseas helped the U.S. trade gap narrow in the second quarter and contributed 1.4 percentage points to economic growth, the most since 1996, according to Commerce Department figures released Aug. 30.

Deere & Co., the world's largest farm-equipment maker, increased its full-year profit forecast on Aug. 15 after overseas orders for tractors helped boost third-quarter earnings 23 percent. The Moline, Illinois-based company also raised its forecast for 2007 equipment sales.

Export Gains

Demand from overseas and growing corporate profits mean businesses have the means to keep spending without having to borrow, economists said. The Commerce Department said last week that corporate profits rose 6.4 percent in the second quarter.

The outlook for the second half of 2007 has soured in recent weeks as concern about defaults on subprime mortgages restricted access to credit. The Fed on Aug. 17 cut the rate charged on direct loans to banks to increase the availability of capital after global stock markets plunged.

Fed Chairman Ben S. Bernanke said on Aug. 31 that the central bank will ``act as needed'' to sustain growth. In a speech to the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, he also said that further credit restrictions ``if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected.''

Traders and economists forecast Fed policy makers will cut the benchmark overnight lending rate between banks at or before their next meeting on Sept. 18.

Manufacturers are less concerned about the turmoil in financial markets, said Norbert Ore, chairman of ISM's factory survey during a press conference.

`In Great Shape'

``Our members aren't mentioning, in terms of comments, a lot of concerns about the overall financial-market picture,'' Ore said. If one didn't know there had been a crisis, the report would suggest ``the economy is in great shape. We are not seeing signs yet that the economy is deteriorating significantly.''

The report also showed that inflation may become less of a concern of the central bank.

The Institute's measure of prices paid fell to 63, the lowest since February, from 65, showing inflation may be easing.

The inventory index dropped to 45.4 from 48.5 in July. A figure below 50 means manufacturers are reducing stockpiles.

The Institute's production index increased to 56.1 in August from 55.6. The supplier delivery gauge, a measure of the time it takes to receive goods, fell to 50 from 52 in July. The measure of orders waiting to be filled dropped to 50.5 from 52.

The employment index climbed to 51.3 from 50.2.

Some companies are still focused on keeping payrolls lean. Dell Inc. said on Aug. 30 it plans to improve productivity and profit by ``reducing headcount where appropriate'' and spending on ``key growth initiatives.''

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

Last Updated: September 4, 2007 10:45 EDT