The U.S. manufacturing sector ended 10 straight months of growth in December and contracted, turning in its weakest performance since the spring of 2003.

Meanwhile, U.S. construction spending unexpectedly climbed during November, managing a small increase even though residential outlays plunged again.

The Institute for Supply Management today reported that its December manufacturing index moved to a contractionary 47.7 in November, from 50.8 in November and 50.9 in October. That was the worse pace of activity since April 2003.

Numbers in the ISM report over 50 indicate growth. Economists had expected the December index to hit 51.0.

The retreat of the factory sector was unexpected and could reinvigorate expectations the Federal Reserve will soon cut rates again.

“Industries close to the housing market appear to be struggling more than others, and those involved in exports seem to be doing better,” said Norbert Ore, who directs the survey for the ISM. “Slower demand appears to be more of a problem than excessive inventories based on the respondents’ comments,” he added.

The details of the ISM report were broadly unfavorable. The private research group said its new orders index for December was 45.7, from 52.6, while its production index hit 47.3, from the prior month’s 51.9.

Developments on the inflation front also remained an issue, with the prices index at 68.0, versus 67.5 in November.

Meanwhile, on the hiring front, the employment index showed contracting payrolls, at a reading of 48.0, from 47.8 the month before. The inventories index for December was 45.5, marking an more broad-based contraction from November’s 46.9.

Meanwhile, total construction spending increased by 0.1% at a seasonally adjusted annual rate of US$1.165 trillion, the U.S. Commerce Department said today. October spending fell 0.4%, reflecting a sharp revision upward. Originally, the government said spending that month tumbled 0.8%.

The increase in November outlays came as a surprise. Wall Street had expected construction spending for the month would decline by 0.4%.

Residential construction spending decreased 2.4% in November to US$492 billion. Residential spending fell by 2.3% in October; it was originally seen down 2.0% for the month. Year-to-year, residential was 17.5% lower in November.