WASHINGTON: US manufacturing activity slowed sharply to a two-year low in December amid a plunge in new orders and hiring at factories, suggesting economy was probably not immune to slowing growth in China and Europe.

The Institute for Supply Management (ISM) survey published on Thursday offered a downbeat assessment of manufacturing sector, with almost all components declining last month.

Concerns about economy's health are escalating despite labour market remaining strong. "The economy is just going to be spinning its wheels with subpar growth in 2019 if purchasing managers report is to be believed," said Chris Rupkey, chief economist at MUFG in New York.

"New orders have dried up and this will take a toll on business investment and growth in 2019." The Institute for Supply Management (ISM) said its index of national factory activity tumbled 5.2 points to 54.1 last month, lowest reading since November 2016.

The drop was largest since October 2008, when economy was in throes of a recession.

A reading above 50 in ISM index indicates an expansion in manufacturing, which accounts for about 12 per cent of US economy. The ISM said that demand had "softened." It said while consumption continued to strengthen, with production and employment still expanding, this was "at much lower levels compared to prior periods." The ISM's new orders sub-index plunged 11 points to 51.1 last month, lowest reading since August 2016.

The survey's factory employment measure dropped to 56.2 in December from 58.4 in prior month. Tariffs imposed by Trump administration on steel and aluminium imports as well as a range of Chinese goods are hurting manufacturers.

Transportation equipment manufacturers said "customer demand continues to decrease due to concerns about economy and tariffs." Machinery makers complained that "ongoing open issues with tariffs between US and China are causing longer-term concerns about costs and sourcing strategies for our manufacturing operations." Computer and electronic product manufacturers said "growth appears to have stopped." President Donald Trump has defended duties as necessary to protect American industries from what he says is unfair foreign competition.

The White House's protectionism has lead to a trade war with China and tit-for-tat tariffs with other trading partners, including European Union, Canada and Mexico. In addition to tariffs, which have raised input costs for manufacturers, factory activity is also being undercut by a strong dollar, a shortage of skilled workers, a fading fiscal stimulus and slowing growth in economies like China. Data this week showed factory activity weakened across much of Europe and Asia in December, with Chinese manufacturing contracting for first time in 19 months.

Apple on Wednesday cut its sales forecast for its quarter ending in December, citing slowing iPhone sales in China. US stocks extended losses on weak ISM survey, with Dow Jones Industrial Average falling more than 600 points at one point.

The dollar dropped against a basket of currencies, while US Treasury yields fell. SLOWING ECONOMY The sharp stock market sell-off has raised spectre of a significant slowdown in growth this year, though economists see no recession.

Some economists believe that resulting tightening in financial market conditions could discourage Federal Reserve from further raising interest rates this year. The Fed increased borrowing costs last month for fourth time in 2018, but forecast fewer rate hikes this year and signalled its tightening cycle is nearing an end in face of financial market volatility and slowing global growth. Despite signs of slowing economic growth, labour market appears strong.

The ADP National Employment Report on Thursday showed private payrolls jumped 271,000 last month after increasing 157,000 in November.

Economists polled by Reuters had forecast private payrolls advancing 178,000 last month.

The ADP report, which is jointly developed with Moody's Analytics, was published ahead of government's more comprehensive employment report for December scheduled for release on Friday. The ADP report has a spotty record predicting private-payrolls component of government's employment report and last month's surge probably exaggerates strength of labour market because of a seasonal quirk.

"The ADP employment report has been susceptible to large swings in December that we think may be in part due to a year-end quirk that has tended to result in ADP printing high relative to payrolls in final month of year," said John Ryding, chief economist at RDQ Economics in New York. Still, other labour market indicators were strong in December, including consumers' perceptions of job market. According to a Reuters survey of economists, nonfarm payrolls likely increased by 177,000 jobs last month after rising 155,000 in November.

The unemployment rate is forecast steady near a 49-year low of 3.7 per cent. With labour market viewed at being at or beyond full employment, pace of job growth is slowing as employers struggle to find workers.

Some of moderation in employment gains has been attributed to stock market rout. A third report from Labor Department showed initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 231,000 for week ended Dec.

29.

Claims have now increased for three straight weeks.

Claims data tends to be noisy around year-end holidays.

The four-week moving average of initial claims, considered a better measure of labour market trends as it irons out week-to-week volatility, slipped 500 to 218,750 last week. "The claims data suggest that conditions in labour market have softened relative to a few months ago when claims readings were very upbeat, but extent of any deterioration is not entirely obvious and does not look extreme at this point," said Daniel Silver, an economist at JPMorgan in New York.