U.S. Manufacturing Unexpectedly Shrinks for Second Month

American manufacturing unexpectedly contracted in July for a second month, reflecting a drop in orders that threatens to undercut a mainstay of the recovery.

The Institute for Supply Management’s factory index was 49.8 last month, little changed from a three-year low of 49.7 reached in June, the Tempe, Arizona-based group said today. Economists surveyed by Bloomberg News projected a reading of 50.2, according to the median estimate, just above the 50 mark that separates expansions and contractions.

Manufacturers from China to the euro area joined the U.S. in showing signs of retrenching, indicating Europe’s debt crisis and the looming U.S. government spending cuts and tax increases that constitute the so-called fiscal cliff are taking a toll on customers globally. Federal Reserve policy makers today acknowledged that the economy has slowed and foreshadowed new steps to boost the weakening expansion.

“We’ve seen slower growth in emerging markets, the recession in Europe -- all of that is still ever-present,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Firms are holding pat right now.”

Another report showed companies added more workers than projected in July. Payrolls climbed by 163,000 after a 172,000 gain the prior month, Roseland, New Jersey-based ADP Employer Services said. The median estimate of 38 economists surveyed by Bloomberg News called for an advance of 120,000.

Stocks erased earlier gains as the Fed’s announcement disappointed investors anticipating a more definitive sign of imminent easing. The Standard & Poor’s 500 Index dropped 0.3 percent to 1,375.32 at the close in New York. Treasury securities declined, sending the yield on the benchmark 10-year note up to 1.52 percent from 1.47 percent late yesterday.

Global Slowdown

U.K. manufacturing shrank in July the most in more than three years as export orders slumped, according to data from London-based Markit Economics. Euro-area factories contracted for a 12th month in July, according to a separate report. A gauge of manufacturing in the 17-nation region fell to a 37-month low of 44 from 45.1 in June.

China’s manufacturing teetered on the edge of contraction in July and South Korea’s exports declined, other figures showed.

Cars and light trucks sold at a 14.1 million annual rate in July, unchanged from the prior month, industry figures showed today. The pace also matched the average for the second quarter, indicating little momentum as the industry heads for the best year since 2007, before the last recession.

Economists’ Estimates

Estimates for the U.S. ISM index in the Bloomberg survey of 84 economists ranged from 48.5 to 52. Manufacturing accounts for about 12 percent of the economy and has been a linchpin for the expansion that began in June 2009.

The ISM’s new orders measure was little changed at 48 from 47.8 in June, the worst back-to-back readings since the economy was in the recession. Three industries in the survey reported growth in bookings, the fewest since February 2009. The group’s export gauge dropped to the lowest level since April of that year.

“It’s the new orders that is really something to watch at this point,” Brad Holcomb, chairman of the ISM survey, said on a conference call with reporters. “I would be very concerned about production staying positive.”

The ISM’s production index was little changed at 51.3 after 51 in June, while a gauge of employment decreased to 52, the lowest level since December 2009, from 56.6 in June.

Cummins Engines

Columbus, Indiana-based Cummins Inc. this week posted a second-quarter profit that exceeded analysts’ estimates. The maker of diesel and natural gas engines forecast full-year revenue of $18 billion, which would be little changed from 2011, down from an earlier projection of a 10 percent increase.

“Continued weakness in some international markets, particularly in Brazil and China, coupled with slowing orders in U.S. truck, oil and gas, and power generation, have caused us to lower our outlook,” Thomas Linebarger, chief executive officer, said on a conference call with analysts.

General Motors Co. and Ford Motor Co. posted unexpected declines in July auto sales compared to the same month last year, industry figures also showed today.

Fed policy makers, who concluded a two-day meeting this afternoon, said it will continue swapping $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities.

Fed Statement

“Economic activity decelerated somewhat over the first half of this year,” the Federal Open Market Committee said. “The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

A Labor Department report in two days may show employment climbed by 100,000 last month after an 80,000 gain in June, according to the median estimate of economists surveyed. The jobless rate is forecast to hold at 8.2 percent.