- Associated Press - Monday, July 2, 2012

WASHINGTON — U.S. manufacturing shrank in June for the first time in nearly three years, adding to signs that economic growth is weakening.

Production declined, and the number of new orders plunged, according to a monthly report released Monday by the Institute for Supply Management.

The slowdown comes as U.S. employers have scaled back hiring, consumers have turned more cautious, Europe faces a recession and manufacturing has slowed in big countries like China.

“This is not good,” said Dan Greenhaus, chief economic strategist at BTIG, an institutional brokerage. Though the report “does not mean recession for the broader economy, it is still a terribly weak number.”

The trade group of purchasing managers said its index of manufacturing activity fell to 49.7. That’s down from 53.5 in May. And it’s the lowest reading since July 2009, a month after the Great Recession officially ended. Readings below 50 indicate contraction.

Stocks fell after the report was released at 10 a.m. The Dow Jones industrial average dropped more than 40 points in midday trading.

Economists said the manufacturing figures were consistent with growth at an annual rate of 1.5 percent or less. That would be down from the January-March quarter’s already tepid annual pace of 1.9 percent.

“Our forecast that the U.S. will grow by around 2 percent this year is now looking a bit optimistic,” said Paul Dales, an economist at Capital Economics.

Despite the discouraging data, most economists aren’t predicting another recession. Though the ISM report suggests manufacturing is contracting, it typically takes a sustained reading below 43 to signal the economy isn’t growing.

Still, U.S. manufacturing, which has helped drive growth since the recession ended, is faltering at a precarious time.

Americans have pulled back on spending, which drives roughly 70 percent of growth. Europe’s economy is likely in recession, which has hurt U.S. exports.

And China’s manufacturing sector grew in June at its slowest pace in seven months, according to a survey released Sunday by the state-affiliated China Federation of Logistics and Purchasing.

The sharp drop in U.S. factory activity overshadowed more positive news on housing. U.S. construction spending rose for the second straight month, though spending remains well below healthy levels.

Manufacturing will likely stay weak for the next few months. The ISM’s gauge of new orders, a measure of future activity, plunged 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.

Fewer new orders reflect growing concerns of businesses. In addition to slower global growth and less spending by U.S. consumers, many worry that U.S. lawmakers won’t extend a package of tax cuts at the end of the year.

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