Companies hired far fewer workers than expected in May and output in the manufacturing sector slowed to its lowest level since 2009, adding to concerns that the recovery is running out of steam.
Economists slashed their forecasts for Friday's U.S. payrolls report, considered the best barometer of the world's biggest economy, after private-sector job growth tumbled to just 38,000, its lowest level in eight months.
Wednesday's reports were the latest signals that U.S. economic growth remained sluggish in the second quarter after hitting a soft patch in the first months of the year.
"This is all consistent with the notion that we've hit a bump in the road when it comes to growth," said Anthony Chan, chief economist at J.P. Morgan Private Wealth Management in New York.
Factory growth around the world weakened last month, surveys from Europe to Asia showed, raising concerns that important export markets for U.S. companies are drying up.
The worse-than-expected U.S. slowdown could prompt the Federal Reserve to stick with its super-easy monetary policies for longer than previously thought.
It also fueled questions about whether the central bank might even embark on a third round of bond-buying to help prop up the economy.
Chan said the weakness was unlikely to last so long as to justify the Fed launching more bond purchases, a move that would run into fierce opposition within the U.S. Congress and from policymakers around the world, but it could force the Fed to keep interest rates low for longer.
The U.S. data sent Wall Street lower, with the broad S&P 500 down more than 1 percent. The euro hit a fresh four-week high against the greenback, and the yield on the 10-year Treasury note fell below 3 percent for the first time in nearly six months.
The ADP report showed private payrolls fell from a downwardly revised 177,000 in April and were well short of expectations for 175,000. It was the lowest level since September 2010.
Goldman Sachs and several other large financial institutions cut their estimates for Friday's non-farm payrolls figure in the wake of the ADP report.
Goldman said employers likely added 100,000 jobs in May, down from its original estimate of 150,000.
MANUFACTURING EXPANSION SLOWS
Separately, the Institute for Supply Management (ISM) said its index of national factory activity fell to 53.5 in May from 60.4 the month before. The reading missed economists' expectations for 57.7.
New orders, a barometer of demand ahead, fell to 51.0 from 61.7 in April, the lowest since June 2009. The prices paid index declined, suggesting commodity price worries were easing.
Companies are managing inventories carefully according to consumer demand, and there did not appear to be a particular impact from supply chain disruptions after Japan's massive earthquake in March, said Bradley Holcomb, chair of the ISM Manufacturing Business Committee in Dallas, Texas.
The manufacturing sector had led the economy out of recession, helped by strength in demand from fast-growing emerging markets, but countries like China and India are trying to curb their acceleration. The export gauge of ISM fell to 55.0 from 62.0.
Heading into Wednesday, the Labor Department report had been expected to show a rise in overall non-farm payrolls of 180,000 in May, slowing down from a gain of 244,000 the month before, according a recent Reuters poll.
Also on the jobs front, the number of planned layoffs at U.S. firms rose modestly in May with the government and non-profit sectors making up a large portion of the cuts, according to a report from consultants Challenger, Gray & Christmas Inc.
The housing market, which has lagged the recovery, continued to struggle as a report from an industry group showed applications for U.S. home mortgages fell last week, pulled lower by a decline in refinancing demand.
Home renovations, however, helped boost construction spending in April to its largest gain in six months, but the prior month's outlays were revised down sharply.
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