Manufacturing Woes Spread From Euro Area To China, And Now They Have Reached The US

U.S. manufacturing grew in June at the slowest pace in almost a year and hiring in the sector also slowed. Europe's fiscal crisis continues to dampen global economic growth prospects with euro area manufacturing output shrinking in June at its fastest pace in three years and a Chinese output gauge also indicating contraction.

The market Economics index of U.S. manufacturing fell to 52.9 in June from 53.9, the London-based group said in its preliminary estimate Thursday. The index's new orders component fell to 54.1 from 54.6.

Manufacturing has been one of the few bright spots of the otherwise frail U.S. economic recovery, but Markit said weaker overseas demand could be starting to slow hiring in the sector.

The employment component fell in June to 53.1, reflecting the weakest rate of hiring in eight months. It stood at 54.3 at the end of May.

The number of Americans filing new claims for unemployment benefits was also little changed last week, the U.S. Labor Department said Thursday.

Job growth in the U.S. slowed sharply for a third consecutive month in May and the unemployment rate rose for the first time in nearly a year to 8.2 percent.

The impact of weak sales on employment is a key concern, Chris Williamson, Markit chief economist, said in the report. With the rate of job creation hitting an eight-month low, the close fit of the survey data with non-farm payroll numbers suggests that the official data for June will show a further weakening of the labour market.

Also on Thursday morning, a survey released by the Philadelphia Federal Reserve Bank showed factory activity in the U.S. mid-Atlantic region contracted for a second month in a row in June as new orders tumbled.

The business activity index dropped to minus 16.6 from minus 5.8 in May, far below economists' expectations for a reading of zero, according to a Reuters poll.

Moreover, the Empire State manufacturing index also declined sharply, to 2.3 in June from 17.1 in May, the New York Federal Reserve Bank said last Friday.

The weight of the evidence therefore suggests that the easing in demand in Europe and Asia is taking a toll on the US economy, said Paul Dales, senior US economist at Capital Economics.

Other data Thursday showed euro-region manufacturing fell to 44.8 from 45.1 in May, Markit Economics said in an initial estimate. That's the lowest in 36 months.

The preliminary reading was 48.1 for a Chinese purchasing managers' index from HSBC Holdings Plc and Markit. A reading below 50 indicates contraction. If confirmed on July 2, the gauge would be at the lowest since November 2011.

Economic projections released by the Federal Reserve on Wednesday saw officials expecting weaker growth, higher unemployment and softer inflation over the next few years.

The Fed said its senior officials now expected U.S. gross domestic product growth of 1.9 percent to 2.4 percent in 2012, half a percentage point lower than they forecast in April. They predicted the unemployment rate would not drop below 8 percent this year, and that inflation would not climb above 1.7 percent.

Motivated by officials' increased worry about the outlook for the U.S. economy, the Federal Open Market Committee (FOMC) opted to extend its Maturity Extension Programme, or Operation Twist, for another six months, but there was no new large-scale asset purchase programme, or QE3.

Nevertheless, Chairman Ben Bernanke said Wednesday that the Fed is ready to act if the situation deteriorates further.

If we don't see further improvement in the labor market, we will be prepared to take additional steps if appropriate, Bernanke said at a press conference following the Fed's two-day policy meeting.