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Damp conditions to limit fireworks from ISM, payrolls

Damp economic conditions may limit any positive fireworks from key economic data this week, with several reports packed into a holiday-shortened week showing only modest improvement, economists said.

In its policy statement this week, the Federal Reserve said it was less worried about the economic outlook than it has been in some time, and that recent data "suggests that the pace of economic contraction is slowing." But it stressed that economic activity "is likely to remain weak for a time.

The second key data point this week will be the ISM factory index, a nationwide look at the manufacturing sector that tends to track the broad economy. It is expected to be the more positive than the job report.

The ISM is a diffusion index, with readings below 50% showing that more manufacturers are contracting than growing. It's a measure of the breadth of economic health across industries and companies.

After hitting a low of 32.9%, the ISM index has been clawing its way back towards 50%. It rose to 42.8% in May. Even more importantly, the new order sub-index rose above 50%.

Boosting expectations of a good report, the government reported that durable-goods orders rose 1.8% in May, well above expectations.

Economists surveyed by MarketWatch expect the ISM to rise to 44.0% in June after rising to 42.8% in May. This would be the fastest pace in ten months. The figure will be released on Wednesday at 10 a.m. Eastern.

Overall, economists said that fireworks may be in order later this year, perhaps by Labor Day, if the ISM factory index rises above 50% and job losses slow to a trickle.