US manufacturing shrank in June for the first time in nearly three years, a troubling sign that the economy is faltering.

The Institute for Supply Management, a trade group of purchasing managers, yesterday said its index of manufacturing activity fell to 49.7 points. That's down from 53.5 in May and the lowest reading since July 2009, one more after the recession officially ended.

Readings below 50 indicate contraction.

A measure of new manufacturing orders fell below 50 for the first time since April 2009. And a gauge of production also fell to its lowest level in more than two years.

US factories are also reporting much less overseas demand, likely because Europe's financial crisis has cut demand for US exports. A measure of exports fell to 47.5, its lowest level since April 2009.

A gauge of employment fell but remained at a healthy level of 56.6. That suggests factories may still be adding jobs. Manufacturers have reported job gains for eight straight months.

The sharp drop in factory activity overshadowed a positive report on US construction spending, which offered more evidence of a slow recovery in the housing market.

Factories have been a key source of jobs and growth since the recession ended almost three years ago. But the sector has shown signs of weakness in recent months.

Manufacturers produced less in May than in April, the Federal Reserve said. Automakers cut back on output for the first time in six months. In June, production barely grew in the New York region and fell sharply in the Philadelphia area, said surveys by regional Federal Reserve banks.

Consumers are less confident in the economy than they have been at any time all year, according to a measure of consumer sentiment released last Friday.