U.S. Factory Activity Falls to Lowest Level in 2 Years

U.S. manufacturing grew at its slowest pace in two years in July as new orders contracted, a troubling development for the faltering economy.

The Institute for Supply Management said on Monday its index of national factory activity fell to 50.9, the lowest level since July 2009, from 55.3 in June.

Economists had expected a reading of 54.9. A reading below 50 indicates contraction in manufacturing.

The economy almost ground to a halt in the first half of the year, government data showed on Friday, with output rising at a tepid a 1.3 percent annual pace in the second quarter after advancing just 0.4 percent in the prior period.

The ISM report suggested the much anticipated bounce back in growth in the second quarter would probably be feeble.

``These are the types of numbers that are consistent with what we saw with the GDP numbers,'' said Keith Hembre, chief economist at Nuveen Asset Management in Minneapolis.

``Absent a governmental shock, we would dredge forward with this stagnant economic performance. We'll be mired in this 1 to 2 percent (growth) environment we have been in.''

Congressional leaders were scrambling to line up Republican and Democratic votes for a White House House-backed deal to raise the U.S. borrowing limit and avert a debt default.

The deal, which raises the $14.3 trillion debt ceiling and cuts about $2.4 trillion from the deficit over the next decade, was hammered out on Sunday.

U.S. stock indexes turned negative after the factory data while bond prices rose. The dollar fell against the yen and the Swiss franc, but rose against the euro.

Manufacturing, which accounts for about 12 percent of gross domestic product, has shouldered the weak recovery from the 2007-09 recession.

Activity last month was held back by weak new orders, whose index fell to 49.2 from -- the lowest in two years, from 51.6 in June. Prices paid index fell to 59 from 68, while the employment index fell to 53.5 from 59.9.

Nonfarm jobs likely rose 85,000 in July, according to a Reuters survey, after June's paltry 18,000 gain. The Labor Department will release its monthly jobs data on Friday.

A separate report from the Commerce Department showed construction spending advanced 0.2 percent to an annual rate of $772.32 billion, the Commerce Department said. May's construction spending was revised to a 0.3 percent increase rather than the previously reported 0.6 percent decline.

Economists had expected construction spending to be flat in June. Overall construction spending fell 4.7 percent from a year ago.

Private construction spending rose 0.8 percent to a seven-month high as an increase in nonresidential outlays offset a second straight month of declines in spending on residential projects.

Spending on public construction projects dropped 0.7 percent to $278.91 billion, the lowest level since March 2007. The decline reflected weak spending on federal projects, which dropped 2.2 percent. State and local government spending fell 0.6 percent to the lowest level since November 2006.