WASHINGTON (MarketWatch) — A key Midwestern manufacturing gauge saw its biggest drop in July since the start of the financial crisis in October 2008, suggesting the possibility of a softer second half U.S. economic performance than had been hoped.

The Chicago purchasing managers index plunged to a reading of 52.6 in July, down from a reading of 62.6 in the prior month and well below the consensus of 63.5.

The July reading was the worst in over a year.

Purchasing managers said the downturn was a “lull” and not the start of a new downward trend.

“Some feedback from panelists points to this being a temporary setback, although we’ll need to see the August data to judge to what extent this is a blip,” said Philip Uglow, chief economist at MNI Indicators.

Jim O’Sullivan, chief economist at High Frequency Economics, said the slowdown was not likely due to the annual shutdown of auto plants to retool for new production.

“It hasn’t been an issue before,” he said.

Michael Gapen, economist at Barclays, said the reversal in the index in July reflects “a moderation of economic activity into the second half of the year after the second-quarter bounce back.”

The economy bounced back to a 4% annual growth rate in the second quarter after a sluggish winter. Gapen said he expects 2.5% growth in the second half.

“The July Chicago PMI would be consistent with this view, although the timing of the move came earlier than we had anticipated,” he said.

After the release of the Chicago PMI data -- which subscribers get three minutes ahead of the public -- stocks continued lower. The Dow Jones Industrial Average DJIA, -0.87% was recently down 161 points to 16,719.

Production activity fell to 51.4 from 70.1. New orders also slowed to 55.7 from 65.1 and the order backlog, which slipped into contractionary territory for the first time since last August.

The Chicago PMI reading comes ahead of the national Institute for Supply Management manufacturing index -- which economists, prior to the poor Chicago reading, forecast to rise to 56.3% from 55.3% in June. Analysts noted that the Chicago PMI can be volatile and does not always foreshadow the national number.

O’Sullivan has been expecting a 57.0% reading of the ISM in July and said he was not a “little less confident” in that forecast. But he said he still expected the ISM to rise in the month, noting that other regional indexes this month weren’t nearly as bearish.

The Empire State manufacturing survey climbed to 25.6 in July from 19.3 in June. It’s the highest level of that index since April 2010. The Philadelphia Fed survey jumped to 23.9 from 17.8. The Milwaukee index, also released Thursday morning, rose to 63.9 in July from 60.6 in the prior month.

Elsewhere on Thursday, the Labor Department reported jobless claims turned higher one week after touching a 14-year low, and the employment cost index rose 0.7% in the second quarter, the fastest growth since 2008.

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