“Although our shipments are up year over year and from prior month, we can feel some head winds, especially from Europe,” an apparel and leather manufacturer said in the ISM report. “We are watching our expenses very tightly and being cautious.”
The institute said its index of manufacturing activity fell 3.8 percentage points in June to 49.7 percent — the first reading since July 2009 that was below 50 percent, which indicates a contraction. However, the group said the overall economy is still expanding.
U.S. stock markets initially swooned on the report, but investors rallied later in the day. The Standard & Poor’s 500 stock index ended up 0.3 percent at 1,366. The blue-chip Dow Jones Industrial Average was nearly flat to close at 12,871.
Investors enjoyed a rally last week as European leaders agreed on a new deal to help countries recapitalize their ailing banks. On Monday, the urgency of the compromise was underscored by a new report showing unemployment in the 17 countries that have adopted the euro reached a record high of 11.1 percent in May.
Economists said uncertainty over Europe’s future helped drive down the institute’s new-order index. The measure plunged 12.3 percentage points in June to its lowest reading since April 2009.
“That big drop in new orders likely suggests that we’re going to see this weakness for more than one month,” said Michael Brown, an economist with Wells Fargo.
About 18 percent of goods exported from the United States last year went to the euro zone, according to government data. During the first quarter of the year, exports to the euro zone were flat compared with the previous quarter.
The report also noted that China’s economy has cooled, which economists say is beginning to hurt U.S. factories.
The slowdown in the United States is particularly worrisome because manufacturing has been one of the few consistent bright spots during the economic recovery. But Brown noted that the institute’s employment index remained relatively steady and firmly within the expansion range. Economists will get a better picture of the jobs market on Friday when the government releases its monthly employment report.
Brown said Monday’s data suggest companies may reduce hours as demand decreases but not lay off workers. “I think this is a reflection of the global slowdown here and it’s starting to hit us domestically as well,” he said.
Paul Dales, senior U.S. economist for Capital Economics, said the institute index is the most reliable leading indicator of the nation’s gross domestic product. He said June’s low reading does not suggest another recession but does point to more anemic growth.
“Our forecast that U.S. GDP will expand by around 2 percent this year is now looking a bit optimistic,” he said.