Manufacturers in the U.S. had their weakest growth in two years last month, as new orders shrank for the first time since the recession officially ended, according to a survey of the nation’s supply executives.

Activity at manufacturing firms in the United States was flat in July, falling to its lowest reading in two years, according to the Institute of Supply Management’s (ISM) latest manufacturing Report on Business. The ISM’s purchasing managers’ index (PMI) fell from 55.3 in June to 50.9 last month. A reading above 50 indicates expansion.

The median forecast in a Bloomberg News survey of 80 economists called for a decline to 54.5.

“The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (57.6 percent) corresponds to a 5.3 percent increase in real gross domestic product (GDP),” Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “In addition, if the PMI for July (50.9 percent) is annualized, it corresponds to a 2.9 percent increase in real GDP annually.”

The PMI topped 60 for four consecutive months earlier this year, and while the nation’s manufacturing sector has expanded for the past 23 months, it has stumbled in recent months.

“Manufacturing posted very strong growth from January to April, but the pace of growth has decelerated markedly since that time and appears to have nearly flattened out by July,” Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, wrote in an analysis of the ISM report. “Some of the late spring and early summer doldrums were caused by supply chain issues related to getting automotive and semiconductor imports from Japan, and transportation delays due to spring flooding in the Midwest. But the underlying problem is that the economy is growing very slowly.”

Last month’s PMI was the lowest reading since June 2009, one month after the recession officially ended.

The ISM report showed new orders contracted for the first time since June 2009, falling to 49.2 from 51.6. Of the 18 manufacturing industries tracked by ISM, half reported decreases in new orders last month.

Production and employment showed continued growth in July, but at slower rates than in June. Production growth slowed to 52.3 from 54.5 in July, while ISM’s employment index registered 53.5 last month, 6.4 points below June’s index but nonetheless indicating growth.

“Businesses have cut back on orders and employment because they are just not seeing the demand that they expected,” John Silvia, chief economist at Wells Fargo Securities LLC, told Bloomberg News. “The economy is just not picking up momentum in the second half.”

Concerns over demand likely spurred businesses to slow down on stockpiling, and inventories contracted after expanding in June. The inventories index registered 49.3 in July, 4.8 points below the 54.1 figure reported in June.

Prices paid by manufacturers also grew more slowly in July, dropping 9 points in July to 59. This marked the 25th consecutive month the prices index has registered above 50.

“In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July,” Holcomb said.

However, exports and imports both grew faster, and several executives surveyed by the ISM noted that export demand remained “strong.” ISM’s index of new export orders registered 54 in July, up slightly from 53.5 in June and marking the 25th consecutive month of growth in the index. Imports of materials by manufacturers registered 53.5, 2.5 points higher than the corresponding figure reported in June. This is the 23rd consecutive month of growth in imports.

Analysts had pinned the slowdown on temporary factors, but signs of a significant pickup are proving elusive.

“The recent easing in economic growth is increasingly looking more like a sustained slowdown than a short-lived soft patch,” Paul Dales, an economist for Capital Economics, said in a Reuters report.

Indeed, the Financial Times (subscription required) reports that while many companies continued to report strong results in the second quarter, there are growing indications of a global industrial slowdown. Analysts described the second half of 2011 as a mixed bag, with some manufacturers continuing to see strong sales while others are hampered by slowing orders. Consumer demand could remain weak, while companies relying on industrial demand may be in a better position. Although an industrial slowdown “is not yet the consensus view,” Morgan Stanley analyst Ben Uglow expects “it will be in a few months.”

MAPI is more optimistic.

“Although the ISM report is gloomy, we expect manufacturing activity to improve,” Meckstroth wrote. “Motor vehicle production schedules are increasing as parts are more available and inventories remain low. In addition, business equipment spending has been, and is expected to remain, relatively strong. Profits are high and firms are willing to invest to upgrade their operations to take advantage of accelerated depreciation.”

Earlier: U.S. Manufacturing Shows Modest Rebound in June

Resources

July 2011 Manufacturing ISM Report On Business
Institute for Supply Management, Aug. 1, 2011

U.S. Economy: Manufacturing Almost Stalls as Orders Drop
by Alex Kowalski
Bloomberg News, Aug. 1, 2011

MAPI Analysis on ISM Index: Supply Chain Issues Factor in Decrease
by Daniel J. Meckstroth
Manufacturers Alliance/MAPI, Aug. 1, 2011

US Factory Growth Slows, Casts Shadow on Economy
by Lucia Mutikani
Reuters, Aug. 1, 2011

Industrial Groups Fear Wheel of Fortune’s Turn (subscription required)
by Chris Bryant, Jeremy Lemer and Peter Marsh
Financial Times, Aug. 3, 2011