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MEXICO CITY, Aug 1 (Reuters) - Activity in Mexico's manufacturing sector shrank in July compared with the previous month, the second straight contraction, a survey showed on Thursday, as Latin America's second-largest economy shows increasing signs of weakness.
The IHS Markit Mexico Manufacturing Purchasing Managers' Index stood at 49.8 in July, an improvement from the 20-month low of 49.2 posted in June but another decline nonetheless.
A figure above 50 signals expansion in the sector, while a reading below that threshold points to contraction.
The manufacturing sector has contracted five times in the last 12 months.
"Mexico's manufacturing industry continued to falter as domestic issues were compounded by sluggish global growth," said IHS Markit economist Pollyanna De Lima, who wrote the report.
Mexico narrowly avoided slipping into recession during the first half of 2019 as gross domestic product grew by a fraction in the second quarter, data showed on Wednesday, but weakness persisted across the board.
Business confidence also weakened in July to the lowest level since HIS Markit began compiling the data in early 2012.
"Firms were highly concerned about the prospects of an economic recession, unstable market conditions, weak client demand and an uncertain outlook," De Lima wrote.
As sales suffer, firms have seen an unplanned rise in stocks of finished goods during July, De Lima added.
"As a consequence, companies reduced production for the second month running and may restrict output further in the near term until stocks are used up," she said.
Confidence in Mexico was rattled at the end of May when U.S. President Donald Trump threatened to impose tariffs on all Mexican imports to the United States if the government of President Andres Manuel Lopez Obrador did not curb illegal immigration from Central America.
A deal that temporarily averted tariffs was reached on June 7, but that came after the economy contracted by 0.2% quarter-on-quarter in the January-March period.
"Lethargic activity in key destinations for Mexican goods exports and trade tensions reportedly curbed external sales," said De Lima.
Mexico sends about 80% of its exports, much of which are goods such as cars and televisions, to the United States.
The PMI index is composed of five sub-indexes tracking changes in new orders, output, employment, suppliers' delivery times and stocks of raw materials.
Reporting by Julia Love; editing by Susan Thomas