The Institute for Supply Management’s purchasing manager’s index for July came in at 50.5, its lowest level since January and well below expectations. The latest data has the U.S. recovery story in doubt.

Economists were calling for a reading of 54.9. This number falls far below expectations, and is well off the previous month’s reading of 56.2. Both the production and new orders indices dropped sharply, by 5.7 and 10.4 points respectively, notes RBC Financial.

“Manufacturing and construction are the two key swing sectors that drive an economic recovery. They are either in decline (construction) or on the edge (manufacturing),” notes BMO Nesbitt Burns.

“Declines of this magnitude, together with the other much weaker-than-expected numbers published this week, cast some doubt on the strength of the recovery. The Federal Reserve is sure to remain on the sidelines for the balance of this year in order to give the economy a chance to regain its footing heading into 2003,” says RBC.

RBC Financial also points out that U.S. unemployment insurance claims for the week ending July 27 came in at 387,000, up from a revised 367,000 one week ago and above market expectations of 375,000. “Today’s data on unemployment insurance claims paints a picture of a labour market hesitant to recover,” notes RBC. “In this context, tomorrow’s employment numbers for July take on a new relevance coming on the heels of a week of weaker-than-expected data. A faltering labour market would cast serious doubt on the sustainability of the current U.S. recovery.”