By Lucia Mutikani
WASHINGTON (Reuters) - Factory activity expanded at its slowest pace in six months in April, the latest sign that economic growth continued to lose momentum early in the second quarter, though the recovery has not been derailed.
Even as the economic picture has dimmed in recent weeks as the effects of government austerity started to filter through, strength in the housing market has provided an anchor.
New home sales in March were at their second-highest level in three years and overall house prices rose in February, other data showed on Tuesday.
"The numbers are not suggesting that the economy is surging, but none of them are really showing that the economy is falling off the cliff," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.
Financial data firm Markit said its "flash," or preliminary, factory purchasing managers' index fell to 52.0 this month from 54.6 in March as output, employment and new orders pulled back.
It was the lowest index level since October, though a reading above 50 does indicate growth.
While the Markit PMI has a shorter history and has been trending higher than an established, competing index from the Institute for Supply Management, its direction is in line with other surveys showing a cooling in manufacturing activity in April.
The Richmond Federal Reserve Bank said on Tuesday its gauge of factory activity in the central Atlantic region dropped into negative territory this month, pulled down by weak shipments and new orders.
The region covers the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia. These are among states expected to be hardest hit by deep government spending cuts, known as the sequester.
Taken together with other weak regional manufacturing surveys released so far this month, Tuesday's factory data pointed to a slackening in activity at the start of the second quarter, economists said.
Although manufacturing accounts for only about 12 percent of the U.S. economy, it has played a pivotal role in the recovery from the 2007-09 recession.
The government is expected to report on Friday that the economy grew at a 3.0 percent annual rate in the first quarter, according to a Reuters survey, rebounding from a paltry 0.4 percent gain in the final three months of 2012.
Economists, however, are looking for an expansion of only around 1.5 percent or so in the April-June period.
Data ranging from employment to retail sales and manufacturing weakened significantly in March, when the sequester began to take effect, and the Markit and Richmond Fed reports suggested the soft patch carried into the second quarter.
"This year is setting up to be very similar as far as the first-half story of the past few years, where an early start in economic activity was not able to be maintained," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
Even so, the economy is not collapsing.
A separate report from the Commerce Department showed new home sales increased 1.5 percent to a seasonally adjusted annual rate of 417,000 units last month.
The increase was encouraging in the wake of data on Monday that showed home resales slipped in March and a report last week that said sentiment among homebuilders dropped in April for a third straight month.
"This is a good report that supports the view that at least one part of the economy is not being battered too greatly by Washington's attacks on growth," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania. "The housing recovery keeps on going, but don't expect further surges in activity."
The momentum in the housing market has slowed somewhat because of a lack of supply of homes for sale in some major regions. Last month, there 153,000 new homes on the market, not far from record lows.
The inventory represents sales supply for only 4.4 months, below the six months that is normally considered a healthy balance between supply and demand.
Another report, from the Federal Housing Finance Administration, showed prices for houses financed with mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac rose 0.7 percent in February after advancing 0.6 percent in January.
(Reporting by Lucia Mutikani in Washington; Additional reporing by Steven C Johnson in New York and Margaret Chadbourn in Washington; editing by Andrea Ricci and Leslie Adler)