Manufacturing growth in New York State slowed much more than expected in May to its slowest pace in five months, while U.S. homebuilders struggled as buyers stayed away from the market, data released on Monday showed.

The report's general business conditions index fell to 11.88 from 21.70 in April, the lowest level since December 2010 and well below economists' expectations of 19.85.

The pace of new orders slowed to 17.19 from 22.34. The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions.

Even so, there was underlying strength in the New York Fed's Empire State manufacturing report, with a gauge of employment rising to its highest level in seven years and economists said the data likely suggested more of a soft patch in the recovery than a slowdown.

The prices paid index jumped to 69.89 from 57.69, the highest level since July 2008. Roughly 70 percent of respondents reported price increases and none reported declines, the report said.

Fewer New York-area manufacturers reported overall improvement in May than in April, but the details underlying this decline, coupled with the relatively strong performance in the component indices, point to more of a pause in the pace of expansion than a slowdown, Nicholas Tenev, an economist at Barclays Capital, wrote in a note.

Separate data showed U.S. homebuilder sentiment was unchanged at low levels in May as on-going foreclosures and tight credit kept buyers reluctant to get into the market.

The National Association of Home Builders/Wells Fargo Housing Market index held at 16, the group said in a statement. Economists polled by Reuters had expected the index to rise to 17.

Readings below 50 mean more builders view market conditions as poor than favorable and the index has not been above 50 since April 2006. High gasoline prices further exacerbated consumers' anxiety, NAHB said.

EMPLOYMENT BRIGHT SPOT

In a positive sign in Monday's data, employment gauges showed some strength. The Empire State index for the number of employees rose to 24.73 from 23.08 the month before. It was the highest level since May 2004. The average employee workweek index jumped to 23.66 from 10.26.

Companies were also more optimistic about the coming months, although they expected input prices to continue to rise. The business conditions index for the next six months rose to 52.69 from 47.44, while the prices paid index climbed to 68.82 from 56.41.

I don't think it's too surprising to see some moderation in the manufacturing sector given the weakness that we're seeing in the consumer end, said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

The higher gasoline prices are reducing real wages, so we expect to see consumer spending slowing down.

Housing remains a drag on the U.S. economic recovery as widespread foreclosures have pushed down home prices. A slow start to the spring selling season hit home improvement chain Lowe's Cos's quarterly results and the company also cut its forecast for the year.

On the retail front, J.C. Penney's quarterly earnings beat estimates and the company also raised its full-year profit forecast after its efforts to remake itself as a more fashionable chain and to shed weak units paid off.

Financial markets were little changed by the U.S. data on Monday with investors focused on a meeting of euro zone finance ministers discussing that region's debt crisis. Under the circumstances, markets did not show much reaction when a U.S. Treasury official said the United States will push right up against its legal limit on borrowing at some point during Monday.

U.S. Treasury Secretary Timothy Geithner told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion borrowing cap.

Timothy geithner Manufacturing