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Manufacturing activity shrinks in June, ISM says

WASHINGTON (MarketWatch) -- Manufacturing activity shrunk in June for the first time in three years as new orders dried up, according to a key report released Monday that points to a deteriorating U.S. economy.

The Institute for Supply Management's manufacturing index fell to 49.7% from 53.5% in May, in the first reading below the 50% line indicating expansion or contraction since July 2009. Read "Recession now much more likely."

The report was worse than the MarketWatch-compiled forecast of 52.3%.

After the release of the ISM data, the yield on the 10-year Treasury note (10_YEAR) dropped sharply, indicating traders rushing for perceived safe investments like government bonds. Read more in Market Snapshot.

Of the 18 manufacturing industries, nine reported contraction and seven reported growth.

The 12.3 point drop in the new-orders index was the largest since the 12.4 point drop in October 2001 -- just a month after the terrorist attacks on the World Trade Center.

The production index dropped sharply by 4.6 points to 51.0%, while the employment index edged back modestly to 56.6% from 56.9%.

The ISM headline index is a seasonally adjusted gauge taken from combining the responses of purchasing managers on new orders, production, employment, supplier deliveries and inventories.

A nearly identical survey released Monday by Markit, which conducts similar surveys across the globe, showed manufacturing activity in expansion territory in June, but at an 18-month low.

The U.S. economy is confronting the headwinds from the euro-zone debt crisis as well as the moribund post-recession recovery.

"Clearly this is the biggest sign yet that the U.S. is catching the slowdown that is well underway in Europe and China," said Paul Dales, senior U.S. economist at Capital Economics, in a note to clients. "But it is worth remembering that a reading of below 47.0 is required to be consistent with another recession. This means the index is still consistent with a growing economy, albeit at an annualized rate of a little below 1%."

Euro-zone manufacturing activity in the second quarter was the worst in three years, according to other surveys released in the last 24 hours. Two separate Chinese surveys both pointed to the weakest levels of the year. Read more on Chinese data.

"Overall demand signals from sales forecast are trending down in all regions," said one purchasing manager in the ISM survey in the computer and electronic products field. "Business has started to show signs of slowing," added another in the furniture and related products industry.

A separate report from the Commerce Department showed the biggest one-month rise in construction spending this year in May. Read more on construction spending.

After nearly a one-third drop in both prices and activity from the burst of the bubble, U.S. housing is beginning to come back.See slideshow of recent economic data.