The Institute for Supply Management, a trade group of purchasing managers, said Wednesday that its index of manufacturing activity ticked up to 49.8, from 49.7 in June.
A reading below 50 indicates contraction. June was the first time the survey showed manufacturing contracted in three years.
The reading points toward more slow growth but not another recession. The trade group says the index needs to fall below 43 to signal a recession is likely.
The July report also showed factories hired in at a slower pace than June, while new orders declined more slowly. And export orders fell to the lowest level since April 2009, evidence of slower global economic growth.
Manufacturing has been a key source of growth in the U.S. since the recession ended in June 2009. But in recent months, factory activity has weakened along with the broader economy.
Job growth has slumped and U.S. consumers and businesses have cut back on spending, lowering demand for factory goods. Europe's economic woes and slower growth in China, India and Brazil have reduced demand for American exports.
"The softness in manufacturing ... does not bode well for growth in the second half of the year," Jeremy Lawson, an economist at BNP Paribas, said in a note to clients.
Financial markets largely shrugged off the manufacturing report. Stocks held their gains in late-morning trading as most investors awaited a statement later in the day from the Federal Reserve, which is concluding its two-day meeting. Many are also anticipating possible action by the European Central Bank on Thursday.
Investors may have also been pleased with a government report on construction spending, which rose for the third straight month. The increase was largely attributed to more homebuilding, supporting the view that the housing market is recovering.
Separately, a third report from payroll services provider ADP said businesses added 163,000 jobs in July. That's a modest gain and slightly below the company's estimate of 172,000 in June.
The figure offers some hope that hiring is improving. Still, ADP has often deviated from the government's report.
The Labor Department will issue the July jobs report Friday. Economists forecast it will show that employers added only 100,000 jobs, according to a survey by FactSet. The unemployment rate will probably remain stuck at 8.2 per cent.
A gain of 100,000 jobs would be an improvement from the monthly average of 75,000 added from April through June. But it would still be far below the healthy pace of 226,000 jobs per month from January through March.
Factories have been a key source of jobs and growth since the recession three years ago. They have benefited from rising exports and a sharp increase in U.S. auto sales.
Manufacturers added an average of only 10,000 jobs a month in the April-June quarter. That was much lower than the average of 41,000 in the first quarter.
Other recent reports on manufacturing have been mixed. The Federal Reserve said earlier this month that factory output rose in June as the production of cars, machines and business equipment rose. That followed a drop in May.
Overall, manufacturing output rose at only a 1.4 per cent annual rate in the second quarter, after a jump of 9.8 per cent in the first three months of the year.
Americans earned more in June than May, according to a Commerce Department report Tuesday. But consumers didn't increase their spending. Instead, they pocked the extra money, boosting the savings rate to 4.4 per cent — its highest point in a year.
Weak consumer spending was a big reason U.S. economic growth slowed in the April-June quarter to a 1.5 per cent annual pace, down from 2 per cent in the first quarter.
Businesses are also more cautious. Orders for long-lasting manufactured goods, excluding the volatile aircraft category, fell 1.1 per cent in June. That was the third drop in four months.