It's that time of the month again. Good news and not-so-good news from the Institute for Supply Management's (ISM) latest monthly U.S. manufacturing report: bad news is manufacturing activity fell to 51.2 in October, lower than forecast, from September's 52.9; good news is it at least continues to grow.

A reading higher than 50 signals expansion. An index figure below 50 percent would have indicated the manufacturing sector was contracting.

Economists expected the index to rise slightly to 53, according to the median of 72 forecasts in a Bloomberg News survey and a Reuters survey of economists. Estimates ranged from 49 to 56.

Within manufacturing, both new orders and production continued to grow last month, albeit more slowly than the month prior. New orders, a gauge of future growth, slipped 2.1 percentage points to 52.1 percent in October, the lowest since May 2005. Production fell 4.2 percentage points to 51.9 percent.

"We are in a significant slowdown in factory activity,'' Richard DeKaser, chief economist at Cleveland, Ohio's National City Corp., told Bloomberg News. "The slowdown in overall economic growth is taking a toll on the factory sector and the reality of somewhat bloated inventories for certain goods is prompting a cutback in production.''

It seems safe to assume slowing auto production will weigh on factory output in coming months. General Motors Corp., Ford Motor Co. and Daimler Chrysler AG's Chrysler have said they are trimming production for the rest of this year because of slumping sales. Moreover, Ford said earlier this week that it plans to cut North American production as much as 12 percent in the first half of 2007. (Stay tuned for next week's IMT issue dedicated to all things Automotive.)

Further, inventory build-up is pushing some companies to cut production as a way to clear their shelves. Caterpillar Inc., the world's largest marker of earthmoving equipment, for instance, began cutting back inventory in its third quarter and said on in mid-October that it expects a "sharp drop" in truck engine sales. They remain optimistic, however.

"We have work to do on our production facilities,"' Caterpillar Chief Financial Officer David Burritt said in an interview on Oct. 20. "We see our business entering a pause, if you will, but beyond that we're optimistic about the future."

Because manufacturers nationally are producing less as the auto and housing industries slow, providing little momentum for the economy at the start of the fourth quarter, companies may be reluctant to spend more on equipment as the expansion shows signs of strain, economists said.

A measure of prices paid for raw materials dropped to the lowest level since February 2002. The gauge of inflation, dropped to 47 from 61. Economists surveyed by Bloomberg had expected a reading of 58.

Fewer factories are paying more for commodities, including crude oil, which may make it less likely they'll have to raise prices on finished goods. The price of a barrel of crude oil traded on the New York Mercantile Exchange fell to its lowest level this year.

The supplier deliveries gauge, which covers how long it takes companies to receive goods, dropped to 50.2 from 54.1, the lowest since June 2003.

Construction spending in September unexpectedly fell 0.3 percent as homebuilding declined for a sixth straight month, the Commerce Department said.

"There's infection from the residential construction sector crash into the broader economy," Richard Iley, senior economist at BNP Paribas in New York, told Reuters. "The Fed remains in denial, thinking that such a big construction bust can remain hermetically sealed off from the rest of the economy."

Analysts said the ISM index would likely have to fall below the 50 break-even level before the Federal Reserve could start easing monetary policy.