By Jonathan Spicer
NEW YORK (Reuters) - Manufacturing in the United States shrank at its sharpest clip in more than three years last month, a survey showed on Tuesday, the latest sign that the slowing global economy is weighing on an already weak U.S. recovery.
August was the third month in a row of contraction in the factory sector, according to an Institute for Supply Management survey. Firms hired the fewest workers since late 2009, a possible red flag for the August U.S. jobs report due on Friday.
ISM's index of national factory activity fell to 49.6 in August, from 49.8 in July, and shy of the 50.0 median estimate in a Reuters poll of economists. A reading below 50 indicates contraction in the key sector.
"Overall, today's report keeps intact concerns that industrial output growth could slow to a crawl in the remaining months of 2012," said JP Morgan economist Michael Feroli.
Manufacturing had faded as a driver of the recovery in the U.S. economy which is still struggling to add jobs more than three years after the recession was formally declared over.
On Monday, data showed a contraction in manufacturing had deepened in both Europe and China.
U.S. unemployment in July remained high at 8.3 percent. Weak jobs growth has caused deep concern at the Federal Reserve. It could add more stimulus as soon as next week. The weak economy is also center stage in the presidential election campaign.
President Barack Obama, heading for the Democratic national convention this week, has previously highlighted the revival of manufacturing as a success story of his economic policies.
Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, called the ISM index "a disappointing number that can bring the Fed a step closer to offering more support to the U.S. economy."
The U.S. dollar briefly trimmed gains against the euro after the ISM data was released, while Treasuries held steady and stocks slipped.
A separate gauge of U.S. manufacturing showed the sector grew in August but at a pace that was still one of the weakest since October 2009.
The Markit Manufacturing Purchasing Managers Index stood at 51.5 last month, higher than the 51.4 reading in July thanks to a slight increase in output and overall new orders.
But August's final reading, released on Tuesday, fell short of a preliminary estimate as exports declined for a third straight month, and firms were slow to add new workers.
New export orders were a drag on activity, as slow or negative growth in Europe and elsewhere sapped foreign demand for U.S. products, the survey showed.
Mark Wingham, a Markit economist, said without a significant jump in activity next month, manufacturing growth in the third quarter "will likely be one of the weakest since recovery began," he said.
ALL EYES ON AUGUST JOBS
The next big test of the U.S. recovery will be the August employment data on Friday. The median forecast of economists polled by Reuters is for a gain of 120,000 jobs, down from 163,000 in July.
Some analysts suspect a number below 100,000 could provoke the Fed to try to boost overall growth with another round of monetary stimulus when it meets in mid-September.
Before the U.S. jobs data, markets await a European Central Bank meeting on Thursday. ECB President Mario Draghi, who has pledged to do "whatever it takes" to save the euro, may present details of a new bond-buying plan that could ease the crisis.
On Monday, Markit's final Eurozone Purchasing Managers' Index (PMI) notched its 13th month of contraction, showing Germany and France are suffering downturns.
Meanwhile, surveys showed China's vast manufacturing sector has been badly hit by slowing new orders.
SLOW RECOVERY IN DETROIT
Fed policymakers have pointed to the euro zone's debt crisis and China's slowing economy as serious hurdles to U.S. economic growth, which was 1.7 percent in the second quarter.
But the Fed's decision on whether to take further policy action is complicated by relatively positive data including a rebound in July U.S. retail sales and a modest uptick in housing this year. A slow recovery is also taking shape in the auto sector. On Tuesday all three Detroit automakers reported sales gains that outstripped analysts' expectations.
Another report showed that lending to small U.S. businesses edged up in July, but the size of the increase was too modest to signal that there was much momentum to the economy.
The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to small American companies, rose to 103.8 from 100.5 in June, PayNet said. Borrowing was up 15 percent from a year earlier.
"It doesn't really signal as much strength in a composite view as you would think," said PayNet founder Bill Phelan. "We're still seeing these very halting numbers, and we're not seeing just a strong indicator of growth."
(Additional reporting by Julie Haviv; Editing by Chizu Nomiyama and Leslie Gevirtz)