The strength of the recovery in the US economy has been thrown into doubt by new data which showed that the manufacturing sector was growing at a sluggish rate.

It will keep the Fed on edge

Jade Zelnik Greenwich Capital Markets

US investors took fright at the news of the survey, sending the Dow Jones stock index down more than 350 points, and share prices tumbling across the world.

The Institute for Supply Management said its index of factory business conditions remained unchanged in August at 50.5.

Because the figure was above 50 it suggested the sector was still growing, but the level of growth was lower than expected.

"The number suggests the manufacturing part of the economy is expanding - but at a very, very slow pace," said Hugh Johnson, chief investment officer at First Albany Corp.

And there was more bad news as the new orders index fell back and factory layoffs continued.

"It's not making anybody happy about the economy," said Carey Leahey, senior US economist at Deutsche Bank Securities.

"The new orders index, probably the most important component for the market at the moment, is down slightly which is a cause for concern in the months ahead," he said.

Rate cuts ahead?

The survey results added to the gloom on Wall Street, and by the close of trade the Dow Jones index had slumped to 8,308.

The worry is that the US economy, having only just climbed out of one recession, could fall back into another one - the so-called 'double dip' recession.

Analysts said the manufacturing figure would add to pressure on the US Federal Reserve to cut interest rates in order to stimulate the economy.

"It will keep the Fed on edge," said Jade Zelnik, chief economist at Greenwich Capital Markets.

"It makes it all the more important we see consumer spending hold up."