Manufacturing growth slowed in July to its weakest rate this year, with measures of new orders and production also slowing.

Still, the manufacturing index was better than many analysts had expected and boosted U.S. stock prices, underscoring the view that manufacturing remains among the strongest sectors of the U.S. economy.

The Institute for Supply Management said on Monday its index of national factory activity fell to 55.5 in July from 56.2 in June, the third consecutive monthly decline. An updated median forecast by 74 economists surveyed by Reuters was for a reading of 54.2.

A reading above 50 reflects expansion. However, July's measure was the lowest reading since December.

Also, the new orders index dropped to 53.5 in July from 58.5 in June to its lowest level since June 2009, while production declined to 57.0 from 61.4.

Even though the decline in the headline number is smaller than expected, the composition shows weakness, particularly in new orders, which is bad news, said Pierre Ellis, senior economist at Decision Economics in New York.

Manufacturing has been leading the recovery, which started in the second half of 2009. But economic data in recent months has signaled the pace of the recovery is slowing.

The ISM data confirm a further slowing in the factory sector, though the pace of expansion remains relatively robust. Indeed, the level of the ISM index in July (55.5) has historically been associated with real GDP growth of 4.5 percent, analysts at RBS said in a note.

We look for growth in the manufacturing sector to track the broader economy more closely (rather than outpace it), they added. However, readings in the low to mid-50s remain far from levels that would suggest the economy is at risk of a double dip.

Following the data, U.S. stocks <.SPX> added to gains, while U.S. Treasury debt prices extended losses. The dollar edged up against the yen but fell against the euro.

On Friday, data showed U.S. economic growth slowed in the second quarter and that consumer sentiment in July hit its lowest since November.

Comments by Federal Reserve Chairman Ben Bernanke on Monday reinforced those concerns. He said the economy, though improving, is still short of full recovery.

An employment component in Monday's ISM report rose, however, providing a positive sign ahead of Friday's monthly jobs report from the U.S. government. Job growth has been the biggest hurdle for improving the economy.

Another report showed U.S. construction spending unexpectedly rose 0.1 percent in June as increased investment in public projects offset the 15th straight monthly decline in private nonresidential construction.

In contrast to Monday's ISM report, data on Friday showed manufacturing activity in the nation's Midwest region accelerated in July as orders rebounded strongly.

Because of concerns about the economic outlook, many strategists see the Federal Reserve keeping overnight interest rates near zero until the second half of next year. The U.S. central bank has said it stands ready to ease monetary policy further if the recovery withers.

(Additional reporting by Ellen Freilich; Editing by Dan Grebler)

Ben Bernanke Manufacturing