The Institute for Supply Management said Monday that its index of manufacturing conditions fell to a reading of 49.5. That’s down from 51.7 in October.
Readings above 50 signal growth, while readings below indicate contraction. Manufacturing grew in October for only the second time since May. The ISM is a trade group of purchasing managers.
A gauge of new orders dropped to its lowest level since August, a sign that production could slow in the coming months. Manufacturers also sharply reduced their stockpiles, indicating companies expect weaker demand.
“Today’s report suggests that the manufacturing sector is likely to remain a weak point in the recovery for a few months yet,” Jeremy Lawson, an economist at BNP Paribas, said in a note to clients.
Stocks declined after the survey was released, giving up early gains. The Dow Jones industrial average was down 12 points in midday trading.
Broader indexes rose only slightly.
The weak manufacturing survey overshadowed other positives economic reports. Greater home building boosted U.S. construction spending in October by the most in five months. Manufacturing activity in China grew in November for the second straight month. And U.S. auto sales rebounded last month after Superstorm Sandy held sales back in October.
U.S. manufacturers are concerned about the “fiscal cliff,” the ISM survey noted. That’s the name for sharp tax increases and government spending cuts that will take effect in January if Congress and the Obama administration fail to strike a budget deal before then.
Worries about the fiscal cliff have led many companies to pull back this year on purchases of machinery and equipment, which signal investment plans. The decline could slow economic growth and hold back hiring in the October-December quarter.
A measure of hiring in the ISM survey fell to 48.4, the lowest reading since September 2009.
Companies “are just backing off and not making any moves until things clear up a bit,” Bradley Holcomb, chairman of the ISM’s survey committee, said.
Consumers also appear nervous about higher taxes. Economists cited the fiscal cliff as a key reason consumer spending fell in October by the most since May.
When consumers cut back on spending, businesses typically reduce their pace of restocking. Both trends are expected to slow economic growth at the end of the year.
The economy grew from July through September at an annual rate of 2.7 percent, largely because of strong growth in inventories. Most economists predict growth is slowing in the current October-December quarter to a rate below 2 percent.
Superstorm Sandy had little impact on factory activity last month, according to the ISM survey. The storm hit the East Coast on Oct. 29 and affected businesses in 24 states.
A gauge of production in the ISM survey rose in November for the third straight month. That’s a sign that Sandy didn’t force many factory shutdowns.
A slowdown in global growth has weighed on U.S. manufacturers. New export orders slipped in November for the second straight month.
Surveys show consumers remain upbeat about the economy, despite the looming taxes and spending cuts. A measure of consumer confidence reached a five-year high in November.
If lawmakers and President Barack Obama can work out a budget deal that averts the tax increases, most economists predict a good year for the economy.
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