Factory activity shrinks for first time since 2012

Manufacturing activity shrank last month for the first time in three years as a strong dollar and weakness overseas continue to crimp the industry.

An index of factory activity fell from 50.1 to 48.6, the lowest level in six years and the first contraction since November 2012, the Institute for Supply Management said Tuesday. A reading above 50 means the sector is expanding; below 50 indicates contraction. Economists expected a rise to 50.5.

A measure of production fell to 49.2 from 52.9.  Most worrisome is that an index of new orders -- a gauge of future production -- declined to 48.9 from 52.9.

A bright spot is that the employment index rose to 51.3 from 47.6, indicating manufacturers added workers after cutting the previous month.

A rising greenback has made U.S. exports more expensive for overseas customers, hobbling shipments already hampered by an economic slowdown in China and other emerging markets. Meanwhile, low oil prices have discouraged drilling activity, dampening the production of steel used for pipes and other materials.

Ten of 18 sectors reported contraction last month, including machinery, primary metals, computers, furniture, apparel and plastics.

Some economists have said the worst of the downturn is likely over. And Federal Reserve officials have said they expect both the dollar and oil prices to stabilize over the next year or so.

Noting that the service sector comprises more than 80% of the economy, Steve Murphy of Capital Economics wrote to clients that Tuesday's report "won't prevent the Fed from raising interest rates" at its meeting next month for the first time in nearly a decade.

But economist Jesse Hurwitz of Barclays Capital says the data suggests "that the tentative stabilization in some manufacturing indicators over the past two months was indeed temporary, and the US manufacturing sector likely faces another leg down."

Paul Davidson on Twitter: @PDavidsonusat.