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.
Factories have been a key source of jobs and growth since the recession ended in June 2009. But the sector has shown signs of weakness in recent months.
The ISM's report points toward more slow growth, rather than another recession. The trade group says the index needs to fall below 43 to signal a recession is likely. The uncertain economic outlook has made consumers and businesses reluctant to spend, lowering demand for factory goods.
The report showed factories kept hiring in July but at a slower pace. And new orders declined more slowly than in June.
Stocks gave up some early gains after the report was released but continued to trade in positive territory. Most investors appeared focused on what steps the Federal Reserve may announce at the end of its two-day meeting Wednesday. Many are also awaiting possible action by the European Central Bank on Thursday.
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 percent annual rate in the second quarter, after a jump of 9.8 percent 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 percent - 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 percent annual pace, down from 2 percent in the first quarter.
Businesses are also more cautious. Orders for long-lasting manufactured goods, excluding the volatile aircraft category, fell 1.1 percent in June. That was the third drop in four months.
That caution is also showing up in hiring. Employers have added an average of only 75,000 jobs in the past three months. That's down from 226,000 in the first quarter. The Labor Department will issue July's jobs report Friday, and economists expect it will show that hiring improved slightly 100,000. The unemployment rate will probably remain stuck at 8.2 percent.
(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)
8/1/2012 7:31:10 AM (GMT -7:00)