Companies hired far fewer workers than expected in May and output in the manufacturing sector slowed to its lowest level since 2009, raising concerns that the U.S. recovery is running out of steam.
Economists slashed their forecasts for Friday's closely watched U.S. payrolls report after private-sector job growth tumbled to just 38,000, its lowest level in eight months.
Losses in U.S. stocks and the value of the dollar accelerated after the Institute for Supply Management (ISM) said its index of national factory activity fell to 53.5 in May from 60.4 the month before.
The reading missed economists' expectations for 57.7.
New orders, a barometer of demand ahead, fell to 51.0 from 61.7 in April, the lowest since June 2009.
"One has to wonder whether the U.S. recovery is starting to stumble. It draws a big bull's-eye on Friday's payrolls report," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.
The ADP Employment Services report on private sector hiring and the ISM data were the latest signals that economic growth remained sluggish in the second quarter after hitting a soft patch in the first months of the year.
Data last month showed the economy grew at a tepid 1.8 percent annual rate in the first quarter, softer than analysts had anticipated.
"This only adds fuel to the argument that the slowdown story is here in the U.S.," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
"This is exactly what we do not want when other significant data shows things are slowing down as well."
The ADP report showed private employers added a scant 38,000 jobs last month, falling from a downwardly revised 177,000 in April and well short of expectations for 175,000. It was the lowest level since September 2010.
Credit Suisse lowered its estimate for Friday's employment number to 120,000 from its previous forecast of 185,000 and its private payroll estimate to 135,000 from 200,000.
ADP's number has been weaker than the government's private payrolls figure for 12 of the last 14 months, making Friday's government numbers likely to come in above ADP's report, Credit Suisse said.
The Labor Department report is expected to show a rise in overall non-farm payrolls of 180,000 in May, slowing down from a gain of 244,000 the month before, according a Reuters poll. Private payrolls are expected to come in at 205,000.
The ADP report is jointly developed with Macroeconomic Advisers LLC, whose chairman said he expects Friday's figure to disappoint.
U.S. stocks extended losses after the ISM survey with the Dow Jones industrial average down nearly 1 percent. The dollar hit an all-time low against the Swiss franc.
The yield on benchmark 10-year Treasury debt slipped to its lowest level since early December.
A separate report showed the number of planned layoffs at U.S. firms rose modestly in May with the government and non-profit sectors making up a large portion of the cuts.
Employers announced 37,135 planned job cuts last month, up 1.8 percent from 36,490 in April, according to a report from consultants Challenger, Gray & Christmas Inc.
The housing market, meanwhile, continued to struggle as a report from an industry group showed applications for U.S. home mortgages fell last week, pulled lower by a decline in refinancing demand.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 4 percent in the week ended May 27.
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