WASHINGTON – Growth in the manufacturing sector slowed in August while construction spending dropped sharply in July, indicating turmoil in the housing and financial markets could be spilling over to the broader economy.

The Tempe, Ariz.-based Institute for Supply Management, an organization of corporate purchasing executives, said its index of business activity in the manufacturing sector registered 52.9 in August, down from 53.8 in July. August was the seventh straight month of expansion for the sector, whose exports have been a bright spot for the American economy.

Wall Street economists were expecting a reading of 53, according to Thomson Financial/IFR. Readings above 50 indicate expansion and below 50 indicate contraction.

The Commerce Department, meanwhile, said today that construction spending dropped 0.4 percent in July, compared with June, the weakest showing since a 0.6 percent fall in January.

It was a bigger drop than economists had been expecting and underscored the continued drag the severe slump in housing is having on building activity.

There were several positive signs for the economy in the ISM survey. The production, employment and export indices increased, while new orders declined but remained above 50.

Manufacturers of agricultural equipment, aircraft and construction equipment, among others, have benefited from a weak American Dollar, which makes American goods less expensive abroad.

“Overall, this report reinforces other indicators showing modest but uneven growth across the manufacturing sector,” David Resler, chief economist at Nomura Securities, wrote in a research note.

“Both the new orders and production index are encouraging for continuing growth as we head toward the fourth quarter of 2007,” Norbert Ore, the chair of the ISM’s survey committee, said.

New export orders increased to 57 from 56.5 in July.

Tom Runiewicz, industrial economist at economic consulting firm Global Insight, said Friday that approximately 30 percent of the farm and construction equipment made in the United States is for export.

Equipment maker Deere & Co. said last month that its third-quarter profit jumped 23 percent on strong international sales. Worldwide equipment sales grew 5 percent, mainly due to a 16 percent rise in agricultural equipment sales and a 15 percent improvement in commercial and consumer equipment sales, the company said.

The new orders index came in at 55.3, below July’s reading of 57.5, while the production index registered 56.1, an increase from 55.6 in July.

The employment index rose to 51.3, up from 50.2 in July.

The prices paid index fell to 63, down from 65, its fourth consecutive month of decline. The index reached 73 in April. The drop in prices paid indicates that manufacturers are facing lower prices for raw materials. That could influence the Federal Reserve as it weighs whether to cut interest rates at its next meeting September 18.

Stock indexes were mixed in early trading, with the Dow up 39.67 points to 13,397.41 and the S&P 500 up 9.61 points to 1483.60.