NEW YORK (Reuters) - Factory activity in New York state contracted for a second month in a row in September, falling to its lowest level in nearly 3-1/2 years as new orders shrank further, a report from the New York Federal Reserve showed on Monday.
The New York Fed's "Empire State" general business conditions index dropped to minus 10.41, from minus 5.85 in August, frustrating economists' forecasts for an improvement to minus 2, according to a Reuters poll. It was the lowest level since April 2009.
The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. The sector contracted in August for the first time in 10 months.
A major contributor to the U.S. recovery as the economy emerged from recession, manufacturing has been faltering in recent months.
Forward-looking new orders tumbled to minus 14.03 from minus 5.50. The measure was at its lowest level since November 2010.
Employment gauges deteriorated also. The index for the number of employees fell to 4.26 from 16.47 and the average employee workweek index slipped to minus 1.06 from 3.53.
"It tells you the economy is still pretty weak. I think when you add it all up, the numbers are still suggesting growth, but it's pretty weak growth," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.
U.S. stock opened modestly lower after a run-up that left the S&P 500 at its highest level in nearly five years.
Manufacturers were less gloomy about the future, with the index of business conditions six months ahead rising to 27.22 from 15.20. The gauge of new orders in six months jumped to 17.02 from 2.35.
While the regional manufacturing reports can be volatile, analysts use them as guideposts for their forecasts for the larger national manufacturing survey, due at the beginning of October. That report from the Institute for Supply Management has shown manufacturing activity has contracted for the last three months.
Other data has been less dire. A different measure of U.S. manufacturing activity from private data ventor Markit has shown growth is sluggish but not contracting. A preliminary reading released later this week is expected to show Markit's manufacturing purchasing managers index held at 51.5, slightly above the 50 level that indicates expansion.
The drop in the New York state data "is probably overdoing some of the gloom," said Paul Dales, senior U.S. economist at Capital Economics.
"Nonetheless, industry is clearly struggling to cope with the overseas slowdown."
The Federal Reserve last week announced a new aggressive stimulus program to try to boost an economy that has been hampered by weaker global growth prospects, uncertainty surrounding the euro zone's debt crisis and high unemployment at home.
The economy slowed to a 1.7 percent pace of growth in the second quarter, and many economists expect it is currently not faring much better.
(Reporting by Leah Schnurr)