By Timothy R. Homan

June 13 (Bloomberg) -- Factories kept churning out more goods last month, while prices and home construction fell, pointing to a manufacturing-led U.S. recovery that is not generating inflation, economists said before reports this week.

“It’s really a sweet spot in terms of continuing growth without inflation,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts. “Manufacturing is still in pretty good shape.”

The need to replenish depleted inventories, growing sales overseas and business investment in new equipment are putting American factories at the forefront of the rebound from the worst recession since the 1930s. A lack of inflation means the Fed has scope to keep the target interest rate near zero in coming months to spur growth.

Manufacturers added 29,000 workers to payrolls in May, a fifth consecutive gain, the workweek lengthened and the average amount of overtime climbed to the highest level in two years, pointing to an acceleration on factory floors, data from the Labor Department showed earlier this month.

Factory Gains

Regional reports may show manufacturing kept driving the recovery this month. Factories in the New York Fed district expanded for an 11th month, a June 15 report will show, while data from the Philadelphia Fed two days later will say those in its area grew for a 10th month, according to economists surveyed.

Deere & Co., the world’s largest farm-equipment maker, said on its website last week that sales of utility tractors rose in the “double digits” in May, compared with a 6 percent increase for the industry overall.

Growing global demand for agricultural commodities, housing and infrastructure are driving sales, Samuel Allen, chief executive officer of the Moline, Illinois-based company, said last month in a statement. Deere last month raised earnings and sales forecasts for a second time this year after second-quarter profit top analysts’ estimates.

Manufacturing shares are outperforming the broader market. The Standard & Poor’s Supercomposite Machinery Index, which includes Deere and Peoria, Illinois-based Caterpillar Inc., is up 7 percent so far this year, compared with a 2.1 decline in the S&P 500 Index on growing concern that the European debt crisis will slow global growth.

Less Inflation

Three reports from the Labor Department this week will show the plunge in fuel prices precipitated by the turmoil in financial markets is tamping inflation.

The import-price index, due on June 15, dropped 1.3 percent in May, after an increase of 0.9 percent the prior month. The producer-price index, issued the following day, declined 0.5 percent after a 0.1 percent decrease in April, according to the survey median.

Consumer prices in May are forecast to drop 0.2 percent, after declining 0.1 percent the previous month, the survey median showed. Excluding food and fuel, the so-called core rate rose 0.1 percent after no change the previous month, economists projected.

The lack of inflation validates the Fed’s strategy to maintain the benchmark lending rates on overnight loans between banks near zero to spur growth. Their next decision on interest rates is due June 23.

Home Construction

One area that may not fare well in coming months is housing. Work began on 648,000 houses at an annual pace last month, down from a 672,000 rate in April, according to the median forecast of economists surveyed before Commerce Department figures June 16.

The end of a government tax credit at the end of the month will cool sales and construction in the second half of the year, economists said. The incentive for first-time homebuyers worth as much as $8,000, which was extended in November to include some current owners, required contracts be signed by April 30 and settled by June 30.

Finally, a report from the Conference Board, a New York- based research group, will show growth outlook brightened last month. The group’s index of leading economic indicators, due on June 17, increased 0.4 percent in May, according to economists surveyed. The measure had climbed for 12 consecutive months before declining 0.1 percent in April.

--With assistance from Chris Middleton in Washington and Greg Chang in San Francisco. Editors: Carlos Torres, Vince Golle

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net