The Institute for Supply Management, a trade group of purchasing managers, said Monday that its manufacturing index fell to 53.5 in January from 55.1 in December. That is the third straight drop and lowest since January 2014. Still, any reading above 50 signals expansion.
Manufacturing helped accelerate economic growth last year as Americans bought more cars and businesses spent more on industrial machinery and equipment. But slower overseas growth and cutbacks in business investment in oil and gas drilling equipment are weighing on factory output. A labour dispute at West Coast ports is also disrupting supply chains for many industries.
New orders grew last month, but at the slowest pace in a year, the survey found. That suggests manufacturing growth will remain modest. Factories added jobs, but at the weakest pace since June. That's a negative sign for this week's jobs report, which will be released Friday.
Still, economists weren't overly concerned by the report. Most said it is consistent with steady growth in the first quarter.
"This decline is no reason to panic," said Paul Ashworth, an economist at Capital Economics, in a note to clients. The report probably reflects the impact of the stronger dollar on large U.S. manufacturers that export many of their goods, he said. It does not capture the services firms, like retailers, that are benefiting from cheaper gas, which has lifted Americans' spending power, Ashworth added.
Bradley Holcomb, chairman of the ISM's manufacturing survey committee, said that cheaper oil is benefiting many manufacturers by cutting their energy costs.
A measure of the prices factories paid for raw materials, including oil and oil-based goods such as plastics, fell to the lowest level in more than five years.
Still, factories face several headwinds. In addition to slower overseas growth, the dollar has risen steadily in value as the U.S. economy's strength has attracted international investors. That makes U.S. goods more expensive overseas. Both trends have weighed on American firms' export sales.
A measure of export orders fell last month to 49.5 from 52, the ISM's report found.
China's factories remained weak last month, according to a survey of purchasing managers in that country by the bank HSBC. Activity at Chinese factories contracted for the second straight month, the survey found.
The stronger dollar also lowers U.S. multinational corporations' overseas profits. Last week, Procter & Gamble, DuPont and Caterpillar all said their earnings took a hit from the strong dollar.
The overseas turmoil dampened the U.S. economy in the final three months of last year. Exports rose at the slowest pace since the beginning of the year. Meanwhile, imports, which become cheaper when the dollar rises, jumped. The wider trade gap shaved growth by a percentage point.
Still, the economy expanded at a decent 2.6 per cent pace, mostly because of strong U.S. consumer spending.
Another drag has come from U.S. businesses, which have cut back sharply on their investments in industrial machinery and other equipment. Oil drilling firms are spending less on developing new fields as the price of oil has plummeted 60 per cent since last June. Business investment in equipment dropped 1.9 per cent in the fourth quarter, the biggest drop since the summer of 2009, the government said Friday.
Lower gas prices have left Americans with much more money to spend on other goods and services. Consumer spending jumped by the most in nine years in last year's fourth quarter.
That is keeping many factories busy. Auto sales rose to the highest level in eight years in 2014. Analysts expect sales will top 17 million this year for the first time in a decade.