The sharp drop in U.S. factory activity overshadowed more positive news on housing.
Construction spending rose 0.9 percent in May from April, the Commerce Department said in a separate report Monday. It was the second straight monthly increase, even though the level of spending still isn't healthy.
The increase was driven by a surge in residential construction. Home sales are up from the same month last year. Mortgage rates are at the lowest levels in history. And prices have begun to stabilize in most markets.
The economy could also get a boost this summer from lower gas prices, which have tumbled more than 60 cents per gallon since peaking in April. The result is that consumers have more money to spend on other goods, from autos and furniture to electronics and vacations, that fuel economic growth.
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