WASHINGTON: Manufacturing shrank in June for the first time in nearly three years, a troubling sign that the economy is faltering.
The Institute for Supply Management, a trade group of purchasing managers, said Monday that its index of manufacturing activity fell to 49.7. That’s down from 53.5 in May and the lowest reading since July 2009, one month after a two-year recession officially ended.
Readings below 50 indicate contraction.
The most troubling sign in the report was a sharp drop in a measure of new orders. The gauge plunged by the most in a decade, from 60.1 to 47.8. That’s the first time it has fallen below 50 since April 2009, when the economy was still in recession.
And a gauge of production also fell to its lowest level in more than two years.
Factories are also reporting much less overseas demand, likely because Europe’s financial crisis has lowered demand for U.S. exports. A measure of exports dropped to 47.5, its lowest level since April 2009.
A gauge of employment edged down but remained at a healthy level of 56.6. That suggests factories might still be adding jobs. Manufacturers have reported job gains for eight straight months.
The sharp drop in factory activity overshadowed a positive report on U.S. construction spending, which offered more evidence of a slow recovery in the housing market.
Factories have been a key source of jobs and growth since the recession ended almost three years ago. But the sector has shown signs of weakness in recent months.
Manufacturers produced less in May than in April, the Federal Reserve said this month. Automakers cut back on output for the first time in six months. In June, manufacturing activity barely grew in the New York region and contracted sharply in the Philadelphia area, according to surveys by regional Federal Reserve banks. Factory output ticked up in Chicago but only after sliding for three months.
Consumers are less confident in the economy than they have been at any time all year, according to a measure of consumer sentiment released Friday. Worries about slowing job growth are outweighing the benefits of lower gas prices. A separate measure of consumer confidence, issued Tuesday, showed that confidence fell for the fourth straight month.
Overall hiring has slowed sharply this spring, raising concerns about the pace of the recovery. Employers added an average of only 73,000 jobs per month in April and May. That’s much lower than the average of 226,000 added in the first three months of this year. The unemployment rate rose in May to 8.2 percent from 8.1 percent, the first increase in a year.
The Federal Reserve has cut its forecast for the year. It now expects growth of just 1.9 percent to 2.4 percent for 2012. That’s half a percentage point lower than the range it estimated in April. The Fed also says unemployment won’t fall much further this year than it has.