WASHINGTON (Reuters) - U.S. manufacturing activity slowed to near a three-year low in June, with a measure of new orders received by factories tumbling, amid growing anxiety over an escalation in trade tensions between the United States and China.

FILE PHOTO: A line worker checks frames for imperfections at Nissan Motor Co's automobile manufacturing plant in Smyrna, Tennessee, U.S., August 23, 2018. REUTERS/William DeShazer/File Photo

Other data on Monday showed construction spending unexpectedly fell in May as investment in private construction projects dropped to its lowest level in nearly 2-1/2 years. The reports were the latest indications that economic growth slowed in the second quarter after getting a temporary boost from exports and an accumulation of inventory.

While the slowdown in factory activity was not as steep as had been flagged by some regional factory surveys, a sharp drop in a gauge of prices paid by manufacturers could be yet another reason for the Federal Reserve to consider cutting interest rates this month.

The U.S. central bank last month signaled it could ease monetary policy as early as this month, citing low inflation as well as growing risks to the economy from U.S.-China trade tensions.

“Manufacturing is clearly taking it on the chin from the rising trade uncertainty,” said Chris Rupkey, chief economist at MUFG in New York.

The Institute for Supply Management (ISM) said its index of national factory activity dropped to 51.7 last month, the lowest reading since October 2016, from 52.1 in May. It was the third straight monthly decline in the index.

A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12 percent of the U.S. economy. Economists polled by Reuters had forecast the ISM index would fall to 51.0 in June.

The ISM said businesses “expressed concern about U.S.-China trade turbulence.” They were also spooked by potential tariffs on Mexican imports, which were averted at the eleventh hour.

The United States’ bitter trade war with China has hurt business sentiment. That, together with disruptions to supply chains caused by import tariffs, is weighing on manufacturing.

U.S. President Donald Trump and Chinese President Xi Jinping on Saturday agreed to a trade truce and a return to talks.

But Trump said he was “in no hurry” to cut a deal and Chinese state media warned there was no guarantee an agreement would be reached. Trump in May raised import tariffs on $200 billion in Chinese goods, prompting Beijing to retaliate.

SLOWING ECONOMY

Manufacturing is also taking a hit from an inventory overhang, which has resulted in businesses placing fewer orders with manufacturers. A reduction in the production of Boeing's BA.N MAX 737 aircraft, which was grounded in March after two fatal plane crashes in five months, is also a drag on activity.

The weakness in factory activity is in sync with a slowdown in economic growth following a temporary boost from exports and an accumulation of inventory. Consumer spending is rising moderately, while the pace of job and wage growth has slowed. In addition, the housing market is struggling and the goods trade deficit widened in May.

The ISM’s forward-looking new orders sub-index decreased 2.7 points to a reading of 50.0 last month, the lowest reading since December 2015. A measure of prices paid by manufacturers tumbled 5.3 points to 47.9.

But there were some glimmers of hope for manufacturing. Factories reported hiring more workers, which included replacing retiring workers and adding summer help. The survey’s factory employment gauge rose to 54.5 from 53.7 in May.

That pointed to a moderate pickup in manufacturing payrolls in June after they were almost flat in May. It also suggested an improvement in overall job growth last month after nonfarm payrolls increased by only 75,000 in May. The government is scheduled to publish June’s employment report on Friday.

Suppliers’ deliveries are improving. While a measure of inventories contracted for the first time since December 2017, with many manufacturers saying they continued to align stocks with softening demand, more customers viewed inventories as too low, which could lead to some increase in orders.

Stocks on Wall Street were trading higher, with the S&P 500 index .SPX hitting an all-time high, as technology stocks gained on a likely reprieve for Chinese telecoms company Huawei. The dollar .DXY rose against a basket of currencies, but U.S. Treasury prices fell.

Despite the persistent weakness, U.S. manufacturing is in relatively better shape compared to the rest of the world. Reports on Monday showed factory activity shrinking across much of Europe and Asia.

The ISM said 12 industries, including machinery, computer and electronic products, textile mills, furniture and electrical equipment, appliances and components reported growth last month. Apparel and transportation equipment were among the five industries reporting a contraction.

Computer and electronic products manufacturers complained that “China tariffs and pending Mexico tariffs are wreaking havoc with supply chains and costs” and described the situation as “crazy.” Transportation equipment manufacturers said “demand for the remainder of 2019 has softened significantly, due to issues in the aerospace industry.”

“While manufacturers’ worst fears about an all-out trade war with China developing imminently have been allayed, uncertainty about the structure of future trading relations continues to linger,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

“We suspect factory activity will continue to struggle in the second half of the year.”

A separate report from the Commerce Department on Monday showed construction spending declined 0.8% in May, the biggest drop since last November, after rising 0.4% in April. Construction spending surged in the first quarter, boosted by increased investment in roads and highways by state and local governments.