U.S. factory activity grew in August at its slowest pace for more than two years, a sign that turmoil overseas and a strong dollar are restraining the domestic economy.
The Institute for Supply Management’s manufacturing purchasing managers index, released Tuesday, fell to 51.1 in August from 52.7 in July. The reading, which still indicates the sector is expanding, was the weakest since May 2013.
Manufacturing “is merely limping along,” said Don Norman, an economist with Manufacturers Alliance for Productivity and Innovation, a trade group.
“Given the headwinds faced by manufacturers—the rise in the value of the dollar, slowing growth in China, and a volatile stock market—it may be that slow growth is about the best that can be expected in the near term,” Mr. Norman said.
The manufacturing report highlights the two-tiered nature of the U.S. economic expansion. Domestically oriented areas of the economy are holding steady, with sustained job growth and solid consumer spending in part due to lower gasoline prices. Separate reports Tuesday showed U.S. construction spending in July hitting its highest level since 2008 and U.S. vehicle sales at their strongest pace in a decade
Sectors of the economy more sensitive to overseas conditions, however, are struggling. Exports have been weakened by a stronger dollar, which makes American goods more expensive to foreign buyers, and slumping economies around the globe also have curtailed demand from abroad.
The ISM survey’s exports index declined to 46.5 last month from 48 in July. That gauge has slid each month since May—the last time it was at a break-even level.
The new-orders index, often viewed as a leading indicator of factory activity, fell to 51.7 from 56.5, suggesting caution among customers as they watched China’s economic outlook deteriorate over the last month.
The ISM survey offers one of the first gauges of August manufacturing. The overall reading has slipped for two straight months. July manufacturing readings from the government, in contrast, showed the sector modestly accelerating. Those improvements largely reflected stronger demand from Americans for cars and trucks.
Manufacturers tied to the energy industry have been suffering over the past year, as oil priced have tumbled from more than $100 a barrel to just below $40 last week. That decline has curtailed burgeoning domestic production, lowering demand for steel, drilling equipment and other manufactured products.
But cheaper oil and a global slump in commodities costs are benefiting many U.S. manufacturers, said Bradley Holcomb, chairman of ISM’s manufacturing business survey committee.
Overall, “growth ranges from steady to modest,” he said. Businesses are reporting paying less for plastic shipping materials and packaging, owing to lower resin prices, and have seen reduced fuel surcharges.
Mr. Holcomb said he expects the deceleration of the past two months to be temporary, with the manufacturing sector’s expansion picking up speed later this year. Manufacturing activity has expanded for 32 straight months.
The report’s employment index slipped to 51.2 from 52.7 the prior month. Since contracting in April, the index has expanded for four straight months and remains consistent with an increase in manufacturing employment in the Labor Department’s monthly jobs report, to be released Friday.
Overall hiring has been steady in recent months. Economists surveyed by The Wall Street Journal estimate the U.S. economy added about 220,000 jobs in August, up from 215,000 the prior month.
