After nearly three years, the Institute for Supply Management's monthly manufacturing survey showed contraction in the sector, as the manufacturing PMI fell to 49.7% in June from 53.5% in May.
The drop was larger than analysts expected and helped send the Dow Jones Industrial Average down more than 50 points in morning trading.
The June figure was the first time the PMI had fallen below 50, which indicates the manufacturing economy is generally expanding, since July 2009. Of the 18 industry sectors tracked, seven reported growth while nine reported they had contracted.
ISM's Bradley Holcomb said comments from manufacturers ranged "from continued optimism to concern that demand may be softening due to uncertainties in the economies in Europe and China."
The new orders index dropped 12.3 percentage points to 47.8% in June, the first time new orders showed contraction since April 2009. The prices index also dropped sharply, to 37% from 47.5% in May.
While the imports index stayed at 53.5% for the fourth straight month, the new exports orders index fell 6 points to 47.5 in June.
Manufacturing production is "downshifting into a slow growth rate for the remainder of this year and into the first half of next year," says Daniel Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI).
“Manufacturing industrial production as reported by the Federal Reserve Board measured the beginning of a deceleration in manufacturing activity back in March 2012,” Meckstroth explains. “MAPI expects little if any growth in manufacturing production in the second quarter of 2012 compared to the first quarter. There are several reasons for this spring deceleration: first, production surged in the first quarter (9.8% annual rate) and was unsustainable given the relatively slow growth in the overall economy; second, the seasonal pattern in manufacturing is distorted by the exceptionally warm winter; and third, the Euro crisis has become much worse, pushing a major trading partner, the Eurozone, into another recession."