The Institute for Supply Management said its index of national manufacturing activity fell to 59.0 in August from 62.0 in July, the lowest since October 2003.
However, the August figure was still not far below January's two-decade high of 63.6, as growth continued for a 15th consecutive month. Economists said the report did not offer any real cause for concern over the state of U.S. manufacturing.
"The ISM, I think, just shows that the overall level of activity is still reasonably strong ... We're still in the midst of a bit of a slowdown from very high levels," said Drew Matus, senior financial economist at Lehman Brothers.
Analysts polled by Reuters had forecast a reading of 60.0 in the headline figure. A reading above 50 signals growth.
Manufacturers still upbeat
Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI, noted that although manufacturing activity had slowed, it had done so from extremely high levels.
"Capital equipment spending has been exceptionally strong lately, but indications are that consumer spending has been hesitant," Meckstroth said.
He said a cooler summer, Hurricane Charley and slower job growth, as well as concern about higher energy prices and security fears could have contributed to the slackening.
"Another pressing concern in the industrial sector is the worsening trade imbalance," Meckstroth said. "The ISM report confirms a disturbing deceleration in exports while imports growth remains at a high level."
In June, the US trade deficit blew out to a record $55.82 billion, which took a chunk out of second-quarter gross domestic product and sparked concern over the outlook for US manufactures as imports far outstripped exports.
The new orders component of the ISM index dropped to 61.2 from 64.7 in July, but the fall was no surprise given the declines in new orders in a number of recent key regional manufacturing surveys.
Ford Motor Co., the second-largest US automaker, said it was cutting its fourth-quarter North American vehicle production after its US sales fell 13% in August.
Hiring continues
While demand for factory-produced goods appears to have hit a soft spot, manufacturers remained upbeat enough in August to continue taking on new staff.
The ISM employment index dropped to 55.7 in August from 57.3 in July, but still held above the 50-level.
"It still shows there's an expansion going on, just not as strong as before. The employment index in this report is still at a high level, though it is cooling off, and shows manufacturers are hiring," said Kevin Logan, senior economist at Dresdner Kleinwort Wasserstein.
Soaring energy prices in August pushed the ISM prices paid component to a three-month peak of 81.5 from 77.0, in line with the brief spike in oil futures prices to nearly $50 a barrel.
While factories hummed along at a slower pace last month, the housing boom showed no sign of abating, as interest rates remained low and consumers were still willing to spend.
A government report showed construction spending hit a record high in July, rising 0.4%, in line with expectations as low mortgage rates and short supply of homes fueled residential building.
All construction spending rose to a seasonally adjusted annual rate of $997.23 billion from an upwardly revised $992.90 billion pace in June.
However, data released earlier showed new applications for US home loans dropped last week for the second week in a row even though 30-year mortgage rates fell slightly.
The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage activity, fell 0.6 percent in the week ending Aug. 27 to 642.7 from the previous week's 646.3. (Reuters)
