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Business Activity in U.S. Unexpectedly Grows at Faster Pace

-- Business activity in the U.S. unexpectedly grew at a faster pace in July as the economy weathered a slowdown in hiring and household spending.

A barometer from the Institute for Supply Management-Chicago Inc. increased to 53.7, the highest since April from 52.9 in June. Readings greater than 50 signal growth. The median forecast of 50 economists surveyed by Bloomberg News projected the purchasing managers’ gauge would decline to 52.5.

The need to rebuild auto inventories may be giving a boost to manufacturing, which had been a key driver of the economic recovery. The Federal Reserve is meeting this week to determine if more stimulus is needed as Europe’s fiscal crisis and the threat of more than $600 billion in U.S. spending cuts and tax increases at year’s end curbed demand.

Manufacturing is showing “modest improvement,’’ Harm Bandholz, chief U.S. economist at UniCredit Group in New York, said before today’s report. “It’s not great but it’s also not that bad.’’

Projections in the Bloomberg survey ranged from 49 to 54.3.

Consumer spending stagnated in June, home prices rose in May from a month earlier and Americans gained confidence in July, other reports today showed.

Household purchases, which account for about 70 percent of the economy, were unchanged after a 0.1 percent decrease in May that was previously reported as little changed, according to figures from the Commerce Department. Americans used the biggest gain in incomes in three months to boost savings, indicating a weak handoff to the second half of the year.

Home Prices

The S&P/Case-Shiller index of property values in 20 cities adjusted for seasonal variations increased 0.9 percent in May, the best performance since July 2009. The measure decreased 0.7 percent from May 2011, the smallest 12-month fall since September 2010.

Consumer confidence unexpectedly rose in July for the first time in five months as Americans became more upbeat about job prospects later this year. The Confidence Board’s index increased to 65.9 from 62.7 in June, figures from the New York-based private research group showed.

Stocks fell on a statement from the German finance ministry that’s it’s holding no talks on the topic of giving Europe’s bailout fund a banking license. The Standard & Poor’s 500 Index fell 0.2 percent to 1,382.63 at 10:09 a.m. in New York.

National Index

Economists watch the Chicago index and regional manufacturing reports for an early reading on the national outlook. The group has said its membership includes manufacturers and service providers with operations in the U.S. and abroad, making the gauge a measure of overall growth.

The Institute for Supply Management’s national factory index, which will be reported tomorrow, probably rose to 50.2 in July from 49.7 the prior month, according to the median projection in a Bloomberg survey. As in the Chicago survey, a reading greater than 50 signals expansion.

The Chicago group’s index of new orders rose to 52.9 from 51.9, which was the lowest since September 2009. The employment measure dropped to 53.3, the lowest level in a year, from 60.4 the prior month. The production gauge fell to 54.5 from 57.

The report continued to cloud the picture, adding to regional readings this month. Similar measure from the Philadelphia and Richmond Federal Reserve Banks showed areas contracted last month, while the New York Fed’s report showed activity picked up.

European Crisis

Joseph Craft, president of Alliance Holdings GP LP, a coal producer in Tulsa, Oklahoma, said while rising natural gas prices are helping coal markets, the European crisis and concerns about what action, if any, the U.S. Congress will take on taxes and spending are causing customers to hold back production and orders.

“Some people believe that everything will get delayed a year and whoever wins the presidency will deal with it next year without any major impact and others believe that politicians will go off the cliff here and create all kinds of consternations,” Craft said in a July 27 earnings call. “And until I think we get clarity, you’re not going to see utilities go out and start committing tonnage.”

The world’s largest economy grew at a 1.5 percent annual rate in the second quarter, down from a 2 percent gain in the previous three months, Commerce Department data showed last week. Consumer spending also climbed at a 1.5 percent pace, the weakest performance in a year.

Chairman Ben S. Bernanke and his colleagues on the Federal Open Market Committee, who have pledged to keep the benchmark interest rate low until late 2014, meet today and tomorrow.

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