A reading below 50 signals contraction. The index has hovered near the 50 "boom-bust" line all year.
The group's inflation index hit a six-month low, however. For the first time in months, there were many items on the list of commodity costs coming down, as prices for copper, corn, fuel oil, natural gas and soybean oil fell.
Although inflation remained higher in August, at a reading of 77, it backed off further from its June high of 91.5, the highest since 1979.
New orders, the backlog of orders, inventories and employment contracted in the sector as high gas prices and worries about the job market kept consumers cautious about spending.
Exports expanded, however, helping to prop up the nation's paper makers, computer producers, chemical and steel companies, among others.
"We're seeing companies being cautious about their second-half plans," said Paul McCarthy, strategy leader for U.S. industrial manufacturing transactions at PricewaterhouseCoopers. "They're focusing on the core, what will be sustainable here in the U.S."
Some economists read the report as an indicator that the economy would weaken in the second half of the year. Sherry Cooper, chief economist at BMO Capital Markets said, "With the global economy slowing and the rebate boost fading, we look for a mild sagging trend to unfold in the second half of the year."
Separately, the Commerce Department said construction spending declined 0.6 percent in July, double the 0.3 percent decrease analysts had been expecting.
Housing activity fell for a 16th consecutive month, declining 2.3 percent to a seasonally adjusted annual rate of $357.8 billion. That was the lowest level since March 2001, the start of the last recession.
Nonresidential activity, which had been offsetting some of the weakness in the residential sector, also fell in July, dropping 0.7 percent to an annual rate of $416.8 billion. It was the first setback in that category since December.
Stocks, which were higher before the reports, pared their gains. The Dow Jones industrial average was up 188.57 at 11,732.12. The Standard & Poor's 500 was up 12.36 at 1,295.19 and the Nasdaq Composite index was up 23.63 at 2,391.15.
AP Economics Writer Martin Crutsinger contributed to this report.