U.S. Mid-Atlantic factory activity plunged this month to its lowest level in nearly two years, a regional central bank said Thursday, the latest sign of softer economic growth.

The Philadelphia Federal Reserve (search) said its business activity index skidded lower to 7.3 in May from 25.3 in April, the largest one-month drop since January 2001 and sharply below Wall Street forecasts of a milder drop to 19.0. A measure above zero denotes growth in the sector.

The report confirmed that May was a tough month for East Coast manufacturers. The New York Fed (search) issued a report earlier in the week that showed this was the first month of contraction for regional factories in two years.

Taken together, the data raise concerns about a broad-based slowdown in the manufacturing sector, which tends to be highly correlated with ups and downs in the overall economy.

"This is part and parcel of the whole concept that we are going into a bit of deceleration in economic activity," said Steve Ricchiuto, chief U.S. economist at ABN Amro.

In a worrisome sign for job-seekers, the survey's employment index slumped to 5.4 from 16.8, while new orders fell to 15.0 from 20.3. The six-month outlook for business conditions slipped to 22.3 from 27.5.

The most recent batch of data have yielded a mixed economic picture. The labor market appears to be recovering and the housing sector continues to break records, while inflation remains reasonably low.

However, analysts are worried that the consumer-led recovery could falter as interest rates rise and gasoline prices stay high, both of which might eventually work to restrain spending.

Low demand appears to be affecting the industrial sector disproportionately. Industrial output fell 0.2 percent in April, taking many economists, including those at the Federal Reserve, by surprise.

"The factory sector is slowing down," said Robert Brusca, chief economist at Fact and Opinion Economics. "The Federal Reserve has suggested before that companies have pricing power. I don't see it to be the case here."

The figures did little to alter expectations for further interest rate increases from the central bank, but coupled with data showing contained inflation, suggested the Fed does not need to be too rushed in tightening monetary policy

The regional survey is one of the first indicators of U.S. manufacturing every month and is often used to gauge the overall state of factories nationwide. The Philadelphia Fed's district covers eastern Pennsylvania, southern New Jersey and the state of Delaware. ."