NEW YORK (CNN/Money) -
U.S. manufacturing activity shrank for a fourth straight month in June, the nation's purchasing managers said Tuesday, falling short of forecasts and casting some doubt on the strength of the economy's second-half recovery.
The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 49.8 from 49.4 in May. Any number below 50 indicates contraction in the sector. Economists, on average, expected the ISM index to rise to 51, according to a Reuters poll.
"While the overall economy appears to be in a recovery, the manufacturing sector failed to grow in June," ISM business survey committee Chairman Norbert Ore said.
ISM's new orders index rose to 52.2 from 51.9 in May. The production index rose to 52.9 from 51.5 in May. And the employment index rose to 46.2 from 43 in May, indicating employers are still laying workers off, but at a slower pace.
Still, the ISM reported "mixed" feelings from survey respondents, who said business spending on capital equipment was still "lagging."
The high price of natural gas was a "major concern" for manufacturers, the ISM said, and may have contributed to June's weakness. Federal Reserve Chairman Alan Greenspan has warned that natural gas prices, driven higher by a supply shortage, could hamper the economy in coming months.
U.S. stock prices fell further after the report, while Treasury bond prices, which were mixed, strengthened a bit.
The economy can grow quite healthily even with a weak manufacturing sector, which contributes only about 15 percent of U.S. gross domestic product (GDP), the broadest economic measure.
Nevertheless, the ISM index is a good measure of business sentiment, and June's index showed business leaders still aren't convinced enough by the hopeful forecasts of a second-half strengthening to start spending money and hiring workers again.
The ISM index was below 50 often in the late 1990s, when the rest of the economy enjoyed a boom, and the factory sector's recession lasted from 2000-2002, compared with the broader economy, which was likely only in recession for part of 2001.
Economists say that with a tax cut, the key Fed interest rate at a 45-year low, and other stimulative factors will fuel GDP growth of better than 3 percent in the third and fourth quarters, compared with 1.4 percent growth in the first quarter and similarly anemic growth in the second quarter.
Many economists, including Greenspan, hoped the economy's bout of weakness in the first half of the year was related to concerns about the U.S.-led war with Iraq. Certainly, activity has recovered in the months since the war ended; but it hasn't enjoyed quite the pop that would seem to signal a coming boom.
"The economy contracted in April and probably contracted in May; June is when we should be getting a bounce," said Brown Brothers Harriman economist Lara Rhame. "If we're to believe all the stars are aligned for a perfect eclipse of the recession in the second half, then it should happen sooner rather than later."