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U.S. Manufacturing Sector Contracts For Third Month

Construction spending also misses big time.

U.S. factory activity shrank for the third straight month in August as new orders, production, and employment all fell.

The Institute for Supply Management (ISM), a trade group of purchasing managers, said Tuesday its index of manufacturing activity ticked down to 49.6. That's down from 49.8 in July and the lowest reading in three years. A reading below 50 indicates contraction.

The report followed other data showing manufacturing has slowed overseas. A measure of factory activity in China fell to its lowest level in more than three years last month. And manufacturing in Europe has also stagnated in the face of the region's financial crisis.

The manufacturing index typically needs to fall to about 43 to suggest the broader economy is shrinking, according to the ISM. Still, growth at or below 2 percent is not enough to significantly lower the unemployment rate, which was 8.3 percent in July.

The stock market fell after the ISM data and a separate report on construction spending were released. Construction spending fell sharply in July. The Dow Jones industrial average dropped 96 points in morning trading.

Indeed, as Zero Hedge puts it, there was a big "miss in construction spending":

"Construction spending ... plunged from 0.4% to -0.9%, on expectations of an unchanged print, which was the biggest miss in a year, and the biggest drop in also a year [emphasis added],” the Hedge adds:

But what about U.S. factories? After all, since the recession technically ended in 2009, they have more or less been one of the main sources of economic growth and jobs.

The ISM survey showed factories kept hiring in July but at a slower pace. And production dropped sharply to 47.2, the first time it has fallen below 50 since May 2009, when the economy was still technically in recession.

New orders, a sign of future production, also dropped. New export orders increased but remained below 50, contracting for the third straight month. Factories reported less demand in the spring after consumers cut back on spending and businesses invested less in machinery and equipment.

The government will report on August hiring and unemployment on Friday.

The decline in manufacturing activity -- compounded with the miss in construction spending --  makes it more likely the Federal Reserve will take steps to "help" the economy. Recall that Chairman Ben Bernanke last Friday said the Federal Reserve will do more to help the still-struggling U.S. economy.

He stopped short of committing the Fed to any specific move. But in his speech to an annual Fed conference in Jackson Hole in Wyoming, Bernanke said that even with interest rates already at super-low levels, the Fed can do more.

Some economists predict the Fed will unveil some bold new step as soon as its Sept. 12-13 meeting, possibly a third round of bond purchases meant to lower long-term interest rates and encourage more borrowing and spending.

Follow Becket Adams (@BecketAdams) on Twitter

The Associated Press contributed to this report. Front page photo courtesy the AP.

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