By Jason Lange
WASHINGTON (Reuters) - The pace of growth at U.S. factories slowed in September, a sign that the chill falling over the global economy could complicate the Federal Reserve's plans to raise interest rates.
Other data on Thursday pointed to a tightening labor market and stronger spending on home construction, highlighting the split in the economy between strong domestic growth and weakness abroad.
This is causing headaches at the Fed, which cited concerns last month about "global economic and financial developments" when it surprised much of Wall Street by holding off on hiking rates.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 50.2, its lowest since May 2013 and just below the median forecast in a Reuters poll.
While any reading above 50 indicates expansion in manufacturing, growth has slowed sharply over the last year as a strong dollar has crimped exports.
More recently, a slowdown in China is dragging on global growth. The ISM's index for exports held steady at 46.5, marking a contraction in activity for the fourth straight month.
The dollar drifted lower while yields on Treasury debt also declined. Wall Street stocks were trading lower.
Despite the weakness abroad, America's domestic economy and the labor market have appeared on more solid footing, which has boosted expectations the Fed could hike rates this year or in early 2016.
The Labor Department said the number of new applications for U.S. jobless benefits rose modestly last week, although they remained near 15-year lows and a gauge of the trend in claims fell.
Initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 277,000 for the week ended Sept. 26.
"Filings at this level are incredibly low by historical standards, speaking to how tight labor markets are getting," said Stephen Stanley, an economist at Amherst Pierpont Securities.
Small businesses added 0.18 worker per firm in September, the best growth this year, the National Federation of Independent Business said in a report. America's monthly employment report due on Friday is expected to show 203,000 positions added to payrolls last month, a pickup from the pace in August.
U.S. construction spending climbed in August to the highest level since 2008, the Commerce Department said in a separate report. The gains were boosted by a surge in outlays for residential projects and gave a sign the housing market was helping the overall economy.
In another sign of domestic strength, the big three U.S. automakers - General Motors Co (NYSE:GM), Ford Motor (NYSE:F) Co and the U.S. operations of Fiat Chrysler Automobiles (NYSE:FCAU) NV - reported a jump in September sales as cheap gasoline and ultra-low interest rates drove demand for sport utility vehicles and pickup trucks.
