Manufacturing in New York State grew at its slowest pace in five months in May, while U.S. homebuilders remained deeply pessimistic as buyers stayed away from the market, data released on Monday showed.

But even as the Federal Reserve Bank of New York reported that general business conditions of its Empire State index fell to the lowest level since last December, there were signs of underlying strength. A gauge of employment rose to the highest level in seven years, and economists said the data likely suggested more of a soft patch in the recovery than a slowdown.

The general business conditions index fell to 11.88 from 21.70 in April, well below economists' expectations of 19.85.

The survey of manufacturing plants in New York state is one of the earliest monthly guideposts to U.S. factory conditions. Manufacturing has been among the strongest sectors as the U.S. economy claws its way back to health, making its progress closely watched as a gauge of the recovery.

The pace of new orders slowed to 17.19 from 22.34.

The prices paid index jumped to 69.89 from 57.69, the highest level since July 2008. Roughly 70 percent of respondents reported price increases and none reported declines, the report said.

Fewer New York-area manufacturers reported overall improvement in May than in April, but the details underlying this decline, coupled with the relatively strong performance in the component indices, point to more of a pause in the pace of expansion than a slowdown, Nicholas Tenev, an economist at Barclays Capital, wrote in a note.

Even so, technology and consumer discretionary stocks on Wall Street tumbled on Monday as investors fretted about signs of weakness in the economy.

Separate data from an industry group showed U.S. homebuilder sentiment was unchanged at low levels in May as on-going foreclosures and tight credit kept buyers reluctant to get into the market.

The National Association of Home Builders/Wells Fargo Housing Market index held at 16, the group said in a statement. Economists polled by Reuters had expected the index to rise to 17.

Readings below 50 mean more builders view market conditions as poor than favorable; the index has not been above 50 since April 2006. High gasoline prices further exacerbated consumers' anxiety, the NAHB said.

Housing remains one of the biggest thorns in the side of the economic recovery as widespread foreclosures have pushed down home prices. A slow start to the spring selling season hit home improvement chain Lowe's Cos's quarterly results and the company cut its forecast for the year.

DEBT WOES

U.S. Treasury Secretary Timothy Geithner, who on Saturday warned of a new recession if Washington was not able to borrow more, told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits its $14.294 trillion borrowing cap.

The U.S. Treasury will issue $72 billion in bonds and notes on Monday, pushing the nation right up against its borrowing cap at some point during the day, according to a Treasury official.

A U.S. Treasury report showed foreigners cut purchases of long-term U.S. securities in March, and analysts said concern about America's public finances may have spurred a shift to shorter-dated assets.

The uneven nature of the economic recovery was seen in the mixed picture from the New York Fed's Empire State index, with some strength in employment gauges. The index for the number of employees rose to 24.73 from 23.08 the month before. It was the highest level since May 2004. The average employee workweek index jumped to 23.66 from 10.26.

Companies were also more optimistic about the coming months, although they expected input prices to continue to rise. The business conditions index for the next six months rose to 52.69 from 47.44, while the prices paid index climbed to 68.82 from 56.41.

I don't think it's too surprising to see some moderation in the manufacturing sector given the weakness that we're seeing in the consumer end, said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

The higher gasoline prices are reducing real wages, so we expect to see consumer spending slowing down.

The recent surge in the price of oil and other commodities has prompted worries that it could hamper consumer spending, though most economists believe the impact will prove to be temporary.

But while home improvement retailer Lowe's reported disappointing results on Monday as caution over the economy tempered spending by consumers, results from retailer J.C. Penney eased fears that high gasoline prices will cause its shoppers to be more frugal. Its quarterly earnings beat estimates and the company raised its full-year profit forecast.

(Editing by Leslie Adler)

Manufacturing