Manufacturing has begun to contract in the US and China for the first time since the Lehman crisis, raising fears of a synchronized downturn in the world's two largest economies.
The closely-watched ISM index of US factories tumbled through the "boom-bust line" of 50 to 49, far below expectations, the Daily Telegraph reports.
It is the lowest since the depths of the crisis in mid-2009 and a clear sign that US budget cuts are starting to squeeze the economy. New orders plunged 3.5 to 48.8 on weak foreign demand and reduced federal contracts.
The news came hours after HSBC said its index for China also fell below 50, a major inflexion point for the world's industrial workshop.
"This is not a good moment for the world economy," said David Bloom, currency chief at HSBC.
"The manufacturing indices came in weaker than expected in China, Korea, India and Russia, and then we got America's ISM.
"We thought we had a clear picture that the US was recovering, Japan was printing money and were we're back to happy days, and now suddenly a huge spanner has been thrown in the works."
Mr Bloom said a sharp strengthening of the Japanese yen on safe-haven flows and the 16% fall of the Nikkei index from its peak are disturbing.
"People are asking whether the 'Abenomics' bubble is bursting."
The OECD says the US is tightening fiscal policy by 3.2% of GDP this year, the biggest squeeze in half a century. Consumers spent their way through the initial shock in the first quarter by slashing the national savings rate to 2.5%.
"People have been living in a psychological bubble," said Charles Dumas from Lombard Street Research. "They ignored the cuts but now they are starting to feel it."
Wall Street reacted calmly to the ISM shock, betting that the US Federal Reserve will delay plans to taper its monthly bond purchases of $85bn (£55.5bn).
Stephen Lewis from Monument Securities said this may be a misjudgement. The latest minutes of the Federal Advisor Council, which advises the Fed on markets, are packed with warnings over the side-effects of quantitative easing.
The council said it is "not clear" that QE is boosting the economy, and warned that zero rates are pushing pension funds underwater on their liabilities, and may be causing firms to defer investment on the grounds that rates will remain low.
They also said Fed purchases of mortgage bonds was depriving banks of "bread and butter" business, pushing them into riskier corporate and emerging market debt, and blowing a "bubble" in fixed income and equity markets.
"Normally the council just goes along with the Fed says but it is clear that they have become more alarmed at aspects of Fed policy, so this is significant," said Mr Lewis.
Fed chairman Ben Bernanke has since begun to echo some of the concerns, testifying to Congress on May 22 that "very low interest rates, if maintained too long, could undermine financial stability".
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