WASHINGTON — U.S. factory activity shrank in August for the first time since August 2016, a sign that the trade war with China is weighing down a crucial sector of the economy.
The Institute for Supply Management, an association of purchasing managers, said Tuesday that its manufacturing index slid to 49.1 last month, from 51.2 in July. Any reading below 50 signals a contraction. That’s the lowest for the index since January 2016.
A global softening in demand, worsened by an increasingly high-risk trade war between the U.S. and China, appears to be hurting American manufacturers. More than half of the public comments from companies surveyed by ISM pointed to economic uncertainty as a drag on their businesses.
Investors were dismayed by the news. Stock prices, which had already fallen at the market’s open, dropped further after the report’s release. The Dow Jones Industrial Average slumped 361 points, or 1.4%, in late morning trading.
Factories are cutting jobs for the first time since September 2016, as the employment index fell 4.3 points to 47.4. A measure of new orders fell by 3.6 percentage points, a sign that output may continue to decline. A measure of production declined by 1.3 points.
Timothy Fiore, chairman of the ISM’s Manufacturing Business Survey Committee, said that the decline in new orders was driven by the contraction in new export orders, which fell to their lowest since April 2009, when global trade was hit by the financial crisis.
“Tariffs are still weighing heavily on supply managers’ minds as they adjust their supply or manufacturing sources,” Fiore said. “Some industries can do it quickly while others need more time.”
As the report indicates a steady decline in future manufacturing, economists have also speculated whether a grim picture of U.S. manufacturing will spill over to affect other areas of the economy.
“Another couple of months of declines on this scale would leave the U.S. facing an entirely unnecessary and self-inflicted recession,” Ian Shepherdson, the chief economist at Pantheon Economics, wrote in a research note.
Surveys of purchasing managers this week have suggested that the uncertainty generated by the trade war has hit manufacturers on a global scale. While surveys of purchasing managers showed mixed results in China, manufacturing activity declined across Japan, Taiwan, and South Korea. In Europe, German manufacturing activity remained close to July’s seven-year low, as new orders fell, producers scaled back output, and job losses rose steeply.
As concerns about a global economic slowdown grow and trade tensions begin to weigh on business sentiment, some economists have also speculated on how the Federal Reserve will react.
Andrew Hunter, senior economist at Capital Economics, said that the ISM report makes it more likely that the Fed will cut rates at its next meeting in two weeks.
“That will only reinforce the concerns of Fed officials over the impact of trade uncertainty on the economy,” he wrote in a note to clients.
Meanwhile, a new round of tariffs on Chinese goods started Sunday, in the latest escalation of the trade war between Washington and Beijing.