NEW YORK (AP) – For those wondering if the economy is headed for a soft or hard landing, Friday’s news on manufacturing hit with a thud.

For the first time in almost four years, the manufacturing sector shrank, according to a widely watched survey, and the implications could reach into other parts of the economy.

Now, markets are pondering whether the Federal Reserve, which has kept interest rates steady since August, will have to lower them sooner than many had expected, as the slump in housing and autos spreads manufacturing, jobs and consumer spending.

The Institute for Supply Management, a trade group based in Tempe, Ariz., said its manufacturing index came in at 49.5 in November, behind October’s reading of 51.2. A reading below 50 indicates the sector is contracting; the reading had come in above 50 since June 2003.

The index was one of two troublesome economic reports that pushed stocks down on Friday. The Commerce Department said construction activity in October plummeted by the largest amount since 2001, and home building fell for the seventh month in a row, the longest decline on record.

The ISM and the construction spending reports could be more pieces of the economic puzzle that may guide the Fed to either keep interest rates level, or perhaps cut short-term interest rates sooner than analysts were expecting. The Fed raised rates for the 17th consecutive time in June, but have held them at 5.25 percent since then.

The government will also be considering next week’s service sector report from ISM. While the service sector has outperformed the manufacturing sector in recent months, and grew more quickly than analysts expected in October, Wall Street is expecting to see slower growth in the November reading.

The manufacturing downturn “does not mean the economy is going to go into a recession,” said Zoltan Pozsar, an economist at Moody’s Economy.com. The U.S. construction and auto industries may have pushed the ISM down, but at most, they make up a third of the industrial base, he noted.

“Orders and production will be soft going into next year,” but will firm up once excess inventory is worked off, he said.

But Pozsar also said the contraction will have a very real impact on employment. He estimated 30,000 jobs were lost in housing-related industries in November and another 300,000 will be lost in the coming year, on top of 100,000 housing jobs lost since March.

“The job market seems a lot weaker than it was a year ago, which points to soft holiday shopping,” Pozsar said, a trend he expects to intensify as the housing slump translates into people feeling less wealthy than when prices were high.

The ISM report said that employment in the manufacturing sector shrank in November, with a 49.2 reading compared with 50.8 in October.

The new orders index fell to 48.7 in November, compared with 52.1 in October. The production index also contracted, dropping to 48.5 from 51.9 last month.

The prices paid index rose to 53.5, after falling to 47 in October. The prices paid index reflects raw materials costs to manufacturers. Prices had been falling until recently, after oil prices fell about 20 percent since the summer but have rebounded in the past few weeks.

J&R Machine Inc., a Shawano, Wis.-based maker of snowplow components and other parts, struggled all year with volatile prices for nonferrous metals such as aluminum and brass.

Timothy Tumanic, J&R Machine’s president, said problems in the auto industry have also trickled down to hurt his company’s business in the third quarter.

“Someone who goes out and buys a new truck goes out and buys a new snow plow,” he said. One of the company’s largest customers, a snow plow maker, cut orders because of falling truck sales, but Tumanic said he expects orders to rebound early next year.

The Commerce Department reported that building activity dropped 1 percent in October after a smaller 0.8 percent drop in September. It was the biggest decline since September 2001, when the terrorist attacks compounded a recession.

Residential construction fell 1.9 percent, the biggest decline since July. Non-residential construction dropped for the second straight month.

Signs pointed to continuing weakness in the U.S. auto industry as well on Friday. Ford Motor Co.’s November sales sank, and were surpassed by Toyota Motor Corp.’s for the second time ever. Earlier in the week, Ford said nearly half of its unionized U.S. work force agreed to early retirement or buyout packages this year, and GM is cutting nearly a third of its U.S. hourly workers this year.

Stock prices fell Friday. The Dow Jones industrials dropped 27.8, or 0.23 percent, to close at 12,194.13, while the Nasdaq composite index shed 18.56, or .76 percent, to close at 2,413.21. The broader Standard & Poor’s 500 index sank 3.92, or 0.28 percent, to close at 1,396.71.

The dollar also fell against most major currencies following the news. The euro hit a 20-month high against the dollar, while the British pound reached its highest level since 1992.

Bond prices rose after the two reports, pushing the yield on the 10-year Treasury note down to 4.43 percent.

While housing and auto-related industries such as wood, furniture, appliances, fabricated metal and transportation equipment all slipped last month, eight industries reported growth. They included apparel and leather; plastics and rubber; primary metals; food, beverage and tobacco; computer and electronic products; printing; chemical products and the miscellaneous category.