WASHINGTON (AP) - U.S. factory activity shrank for the third straight month in August as new orders, production and employment all fell. The report adds to other signs that manufacturing is slowing.

The Institute for Supply Management, a trade group of purchasing managers, says its index of manufacturing activity ticked down to 49.6. That's down from 49.7 in July and the lowest reading in three years. A reading below 50 indicates contraction.

Factories have been a key source of jobs and growth since the recession ended in June 2009. But the sector has shown signs of weakness in recent months.

The report showed factories kept hiring in July but at a slower pace. And production dropped sharply to 47.2.

Meanwhile, U.S. construction spending fell in July from June by the largest amount in a year, weighed down by a big drop in spending on home improvement projects.

The Commerce Department says construction spending declined 0.9 percent in July. It followed three months of gains driven by increases in home and apartment construction. New home construction rose again in July, but spending on home renovation projects fell by 5.5 percent.

Spending was also down for non-residential projects and government construction projects as well.

The June decline left spending at a seasonally adjusted annual rate of $834.4 billion, up 11.8 percent from a 12-year low hit in February 2011. Construction activity is roughly half of what economists consider to be healthy.