A key survey of U.S. manufacturing activity fell to its lowest in six months, while contracts for pending sales of previously owned homes plunged a record 30 percent in May, far more than expected,

ISM:

PENDING HOME SALES:

CONSTRUCTION SPENDING: Construction spending fell 0.2 percent in May, the U.S. Commerce Department said, as declines in private-sector building overshadowed gains in public-funded construction.

KEY POINTS: * June marked the second straight month of slower growth.

The Institute for Supply Management said its index of national factory activity fell to 56.2 in June from 59.7 in May. The median forecast of 72 economists surveyed by Reuters was for a reading of 59.0. * A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion. The report's employment component fell to 57.8 from 59.8. New orders also fell to 58.5, suggesting growth may be moderating. * The National Association of Realtors said on Thursday that its Pending Home Sales Index, based on contracts signed in May, fell to a record low 77.6 from 110.9 in April. Economists polled by Reuters had expected a smaller decline of 12.5 percent in May. * Construction outlays fell 0.2 percent in the month to an annual rate of $841.9 billion, the Commerce Department said. Analysts polled by Reuters were expecting a 0.8 percent drop.

COMMENTS:

MARK PAWLAK, MARKET STRATEGIST, KEEFE, BRUYETTE & WOODS, NEW YORK:

The numbers continue to underwhelm. Our expectations have been that the economy is shifting to a lower gear. Small businesses are not hiring, and inflation is very low and is trending lower.

Home sales are fitting to what we've seen. No one is pleased to see them. We are not seeing the lift in housing than what we had hoped. For home sales to improve on their own, we need job growth.

The onus is for bulls of risk assets to prove their case. The data don't seem to be improving at this point and this trend will continue. Tomorrow could potentially be a game-changer with the focus private payroll growth.

Bonds will continue to benefit from this with the risk of deflation and the flight-to-quality trade.

JOSEPH BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS, YARDLEY, PENNSYLVANIA:

None of the data is good for the bullish camp, which was expecting a V-shaped recovery for the rest of the year. These numbers suggest fatigue in the consumer sector and a deceleration in government spending as it relates to the stimulus. It also suggests more risk of deflation than inflation, which is why bonds continue to strengthen and stocks continue to weaken.

We've already seen weak housing numbers and payroll numbers, and this continues the trend. It means that earnings expectations are probably too high for the second half of the year, which increases the perception that there's more risk in stocks.

Tomorrow could be a very painful day for data as the unemployment rate could tick up. The math is all very simple- 70 percent of the economy is the consumer, and right now the consumer has too much debt to restart the spending cycle. You can see that in everything from houses to auto sales. This is something you just can't get around.

PETER KENNY, MANAGING DIRECTOR AT KNIGHT EQUITY MARKETS. JERSEY CITY, NEW JERSEY:

This is clearly pointing to a double-dip recession.

The market's attempts at a rally were on life support until this housing and construction data came out, that life support was pulled out on the effort to close higher on the first day of the quarter.

This will contribute not so much to more volatility, but to the market moving in one direction: lower.

This should effectively extinguish expectations of any kind of a positive momentum at the beginning of the third quarter. Whether it's ISM or any other index, they're all negative and they are broadly negative.

CHRISTOPHER LOW, CHIEF ECONOMIST, FTN FINANCIAL, NEW YORK

ISM: Everything is down. And so the surprise is not so much in the headline, it's in the details. Some of the things that rose in the Chicago index particularly the new orders are down in the ISM index so it's a slowdown across the board in manufacturing growth.

The data do not show a double dip yet and that's especially visible in the ISM. It was still in the 50s. I think the markets are trading political uncertainty.

We've been trading under 3 percent for two days (in 10-year yields) and we've reached a new low, 2.91, today. But it's hard to tell if it's the economic weakness or the fact that the Dow is down another 65 points. Any time you have the stock market down more than 10 percent in a quarter and still falling it's important. At the moment bonds are benefiting from the flight of capital out of stocks.

MARKET REACTION: STOCKS: U.S. stock indexes added to losses. BONDS: U.S. Treasury debt prices were steady. DOLLAR: U.S. dollar added to losses against the euro.

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