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Manufacturing sector shrinks for third straight month

Manufacturing shrank at its sharpest clip in more than three years in August, the third month of contraction in a row, and firms hired the fewest workers since late 2009, a survey on Tuesday showed.

The Institute for Supply Management said its index of national factory activity fell to 49.6 in August from 49.8 in July.

The reading fell shy of the 50.0 median estimate in a Reuters poll of economists. A reading below 50 indicates contraction in the sector.

The index's employment component fell to 51.6, the lowest since November 2009, from 52.0 in July.

"It is without question a soft report on manufacturing and what is particularly disconcerting is that the new orders index deteriorated again," said Tom Porcelli, chief U.S. economist for RBC Capital Markets. "It has become increasingly clear that the manufacturing sector is losing momentum. This soft report leading into Friday's payrolls will only solidify additional action from the Fed if we see another soft jobs report."

New orders, a forward-looking sub-index, fell to 47.1 in August, the worst showing since April of 2009. It stood at 48 in July.

The exports index ticked up to 47 last month from 46.5 in July but remained in contraction territory as recession in parts of Europe and slower growth in Asia sapped demand for U.S. goods.

"Given everything we see internationally in terms of demand for our manufacturers, a little slowdown is to be expected, especially with the euro zone still under pressure and emerging economies experiencing relatively slow growth," said Patrick O'Keefe, director of economic research at J.J. Cohn. "Domestically, new orders for manufacturing were up a bit but not robustly so it isn't unexpected to see something a bit more cautious."

Reuters contributed to this report.