WASHINGTON (Reuters) -U.S. manufacturing contracted for a fifth straight month in July and factory employment dropped to the lowest level in five years amid tariffs that have raised prices of imported raw materials.

The Institute for Supply Management (ISM) said on Friday that its manufacturing PMI dropped to 48.0 last month from 49.0 in June. A PMI reading below 50 indicates contraction in manufacturing, which accounts for 10.2% of the economy.

Economists polled by Reuters had forecast the PMI edging up to 49.5. The weak PMI reading is consistent with economists' expectations for a slowdown in activity in the third quarter as the effects of the import duties become more apparent.

The ISM survey's forward-looking new orders sub-index rose to 47.1 from 46.4 in June but this was still a contraction for the sixth consecutive month. Its production measure increased to 51.4 from 50.3 in the prior month.

Despite the rise in production, factories continued to shed jobs. The survey's measure of manufacturing employment decreased to 43.4, the lowest level since July 2020, from 45.0 in June. The ISM has noted an "acceleration of headcount reductions due to uncertain near- to mid-term demand." 

Delivery times improved last month, helping to slow the pace of increase for input prices. The ISM survey's supplier deliveries index dropped to 49.3 from 54.2 in June. Its gauge of prices paid by factories for inputs declined to a still-high 64.8 last month from 69.7 in June. 

   Government data on Thursday showed goods prices increased in June by the most in five months, with economists saying this was the start of a tariff-driven rise in goods inflation that they expected to persist through the second half of the year.