Economists largely blamed frigid temperatures for the chill in economic activity and said they expected a rebound in the months ahead. However, they also cautioned that the economy was receiving some payback after a strong performance in the second half of 2013.
"The disappointing data provide further confirmation of a dramatic slowing in economic growth momentum," said Millan Mulraine, deputy chief economist at TD Securities in New York.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 51.3 last month, its lowest level since May 2013, from 56.5 in December.
Bad weather also appeared to hurt U.S. auto sales in January, with Ford Motor Co, General Motors Co and Japan's Toyota Motor Sales USA reported a slide in sales for the month.
U.S. stocks fell sharply on the manufacturing data, with the Dow Jones industrial average off 1.5 percent and the S&P 500 losing 1.7 percent. The yield on the benchmark 10-year Treasury note hit its lowest level since early November and the dollar dropped against a basket of currencies.
Mulraine, however, said "to the extent that this weakening can be attributed to weather-effects, we expect activity to rebound meaningfully in the coming months."
January's ISM figure was also well below the median forecast of 56 in a Reuters poll of economists, missing even the lowest estimate of 54.2. Readings above 50 indicate expansion.
It was the second straight month of slowing growth from November's recent peak reading of 57, which had been the highest since April 2011, and indicated manufacturing was slowing after output grew at its fastest pace in nearly two years in the fourth quarter.
Underscoring the weather impact, delivery delays increased a bit last month, but the biggest red flag was the huge drop in the forward-looking new orders index, which fell to 51.2 from 64.4 in December. That 13.2-point drop was the largest monthly decline in the key component since December 1980.
"While the magnitude of the decline in the ISM index may have exaggerated the degree of cooling in the underlying pace of factory activity, it reinforces our belief that the optimism surrounding a burst of capital investment in 2014 is overdone," said Michelle Girard, chief economist at RBS in Stamford, Connecticut.
Economists also noted that the ISM survey had been running too strong relative to other factory indicators.
SLOW FIRST-QUARTER GROWTH EYED
In a separate report, the Commerce Department said construction spending rose 0.1 percent in December, slowing from the prior month's 0.8 percent increase.
While private construction spending hit a five year high, outlays on public construction projects recorded their biggest drop in a year, reflecting the drag from weak state and local government spending.
The soft construction spending data will probably not have much effect on the government's advance fourth-quarter gross domestic product estimate as it was broadly in line with assumptions.
The government reported last week that the economy grew at a 3.2 percent annual pace, supported by consumer spending, exports and inventory accumulation, after logging a 4.1 percent rate in the prior quarter.
It expanded at a brisk 3.7 percent pace in the second half of the year, up sharply from 1.8 percent in the first six months of the year. It was the biggest half-year gain since the second half of 2003.
Exports are not expected to match their strong growth and businesses are expected to step back from restocking. When added to the impact of cold weather, that suggests a slowdown in first quarter growth is in the cards, analysts said.
Indeed, the ISM survey showed a pullback in new export orders and a contraction in inventories.
"An earlier pickup in manufacturing production and inventory building in the second half of 2013 is slowing down," said Ryan Wang, a U.S. economist at HSBC in New York.
The prices index hit an 11 month high. Economists, however, said that was mostly energy-related after the cold snap caused a shortage of propane and pushed up prices for electricity and heating oil in some parts of the country.
An indicator of employment fell to its lowest level since June. Economists said that posed a downside risk to expectations of a rebound in employment in January after a surprise slowdown in December.
January's employment report will be released on Friday and is expected to show nonfarm payrolls rebounded to 185,000 in the month from 74,000 in December, according to a Reuters survey.