By Eric Morath 

U.S. manufacturing activity expanded at its slowest pace in more than two years, a sign global turmoil and a strong dollar could be limiting factories.

The Institute for Supply Management's manufacturing purchasing managers index fell to 51.1 in August from 52.7 in July. The reading, which still indicates the sector is expanding, was the weakest since May 2013. Economists surveyed by The Wall Street Journal had expected the August PMI to hold steady at 52.7.

"The renewed slide in oil, strength in the dollar and prospects for weaker global growth--China--all pose risks to a further slowing in factory activity in the months ahead," said RBS Securities economist Michelle Girard.

A pull back in demand and weaker exports dragged on the overall reading.

The ISM new orders index, often viewed as a leading indicator of activity, decreased to 51.7 from 56.5.. Meanwhile, the exports index fell to 46.5 last month from 48 in July.

Exports have been weak due to a stronger dollar making U.S.-made goods more expensive and slumping economies around the globe curtailing demand overseas.

The ISM production index fell to 53.6 from 56.

The overall ISM reading has slipped for two straight months. Other measures of manufacturing showed the sector modestly accelerating this summer. Orders for durable goods rose 2% in July, according to the Commerce Department, and industrial production increased in July by the most since November, according to the Federal Reserve.

Those reports showed strong demand for cars and trucks supporting domestic manufacturing.

U.S. manufacturers, outside those tied to the energy industry, are benefiting from lower oil prices and raw material costs, said Bradley Holcomb, chairman of ISM's manufacturing business survey committee.

Overall "growth ranges from steady to modest," he said. Businesses are reporting they're paying less for containers, due to lower resin prices, and have seen reduced fuel surcharges.

Mr. Holcomb expects the decelerating expansion the past two months to be just a temporary slowdown. He said the manufacturing sector's expansion should strengthen later this year. Manufacturing activity has expanded for 32 straight months.

The report's employment index slipped to 51.2 from 52.7 the prior month. Overall hiring has been steady in recent months.

The Labor Department will release the August employment report Friday. Economists surveyed by The Wall Street Journal think the U.S. economy added about 220,000 jobs last month, up from 215,000 the prior month.

Write to Eric Morath at eric.morath@wsj.com

(END) Dow Jones Newswires

September 01, 2015 11:45 ET (15:45 GMT)