US factory output at three-year low

US manufacturing activity contracted for the first time in three years, further denting confidence in a global economy that is already feeling the effects of the eurozone debt crisis and China’s economic slowdown.

In a shock to economists who were expecting manufacturing growth to slow moderately, the Institute for Supply Management’s survey on the US industrial sector reported a large decline in activity from 53.5 in May to 49.7 in June – its lowest level since the recession ended in mid-2009.

Any reading in the ISM index below 50 indicates a contraction in activity, while above 50 signals an expansion. David Semmens, economist at Standard Chartered described the number as a “really terrible” result.

The weak ISM data came after purchasing managers surveys showed China’s industrial sector expanded at its slowest pace in seven months, while eurozone manufacturing also remained stuck at its weakest level in three years. “A significant part of the weakness looks to be trade contagion,” said Alan Ruskin of Deutsche Bank.

Eurozone manufacturing activity has contracted each month since August 2011. In Germany, the eurozone’s largest economy, the index for June showed manufacturing activity shrinking at its fastest pace since June 2009.

The ISM’s new orders index, although a traditionally volatile measure, was hit particularly hard and could signal a decline in overseas demand for US products. “The manufacturing sector is particularly vulnerable to the slowdown in global activity,” said Joshua Dennerlein of Bank of America Merrill Lynch.

Two weeks ago, the Federal Reserve extended “Operation Twist” – selling short-term government bonds while buying long-term debt – in an effort to support the economy by lowering long-term interest rates.

Further signs that America’s economy is feeling the impact of slower growth in emerging markets and continued turmoil in Europe could spur the US central bank to take more aggressive action in coming months including a new round of asset purchases, or “QE3”.

Record-high eurozone unemployment and continued manufacturing weakness could force the European Central Bank to lower rates later this week, according to Ken Wattret, economist at BNP Paribas.

“There is little in these numbers to challenge the view that the ECB should be cutting rates,” he said. “The only question is by how much.”

In the UK, the PMI was better than many analysts had feared, but still showed manufacturing activity had contracted for the second month in a row.

The Bank of England is expected to announce another round of QE later this week, given that the UK and global economy are far weaker than the Monetary Policy Committee had thought even just a few months ago.