The National Association of Purchasing Management said its production index fell to 51.8 percent in June from 53.2 percent in May. The figure was considerably lower than the 53 percent predicted by Wall Street analysts.
It was the lowest reading since 49.9 percent in January 1999.
Spending on construction, however, rose a surprising 0.1 percent in May as a jump in spending by the private sector on commercial buildings more than offset reduced outlays for residential and big government projects.
The Commerce Department reported Monday that construction spending nationwide edged up to a seasonally adjusted annual rate of $809.3 billion in May, up from an April figure of $808.2 billion
"The overall picture is one of slower growth in manufacturing activity during the month of June," said Norbert J. Ore of the NAPM, who oversees the monthly tabulation. "The rate of growth has moderated significantly...and the number of industries reporting growth declined from 14 to 11 when comparing June to May."
Despite the decline in the index reading in June, the industrial economy is still growing, though at a slower rate: Any reading above 50 indicates growth. This was the 17th consecutive month of growth, according to the survey.
The construction performance was stronger than many analysts expected. They were forecasting that construction spending would fall by 0.3 percent in May.
In April, construction spending fell by 1.1 percent, a sharper decline than the government previously estimated.
Still, the figures are the latest evidence that the Federal Reserve policy-makers' six rate increases over the past year have begun to slow the economy. The Fed feared that unchecked growth would lead to inflation. Other reports have indicated a slowing in retail sales, as well as in home purchases.
The production management survey, which is based on a national survey of executives who buy raw materials and other supplies for industry, is closely watched because it is the first national reading for June on U.S. manufacturing performance, a key economic sector.
May's construction increase was led by a 3.5 percent rise in spending by the private sector on commercial projects. That pushed such spending to a seasonally adjusted annual rate of $225.9 billion in May.
Increases were registered in industrial projects and hotels and motels, while decreases were posted for office buildings. In April, spending on commercial, or nonresidential projects, inched up 0.1 percent.
May's rise in spending for all private nonresidential projects more than outweighed declines elsewhere.
Spending on big government projects fell 2.8 percent in May to a seasonally adjusted annual rate of $169.3 billion after a 3.1 percent decline in April.
Outlays for publihousing, highways and streets declined, while spending on schools and hospitals increased.
For residential projects, spending fell 0.4 percent to a rate of $368 billion in May with both new single-family homes and apartment and condo complexes showing declines. In April, spending on all residential projects fell 0.7 percent.
©2000 CBS Worldwide Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report