A worker uses a welding torch on semi-trailer frame at the Wabash National Corp. manufacturing facility in Indiana, US on August 13 2019. Picture: LUKE SHARRETT / BLOOMBERG
A worker uses a welding torch on semi-trailer frame at the Wabash National Corp. manufacturing facility in Indiana, US on August 13 2019. Picture: LUKE SHARRETT / BLOOMBERG

Washington  — US manufacturing activity contracted for the first time in three years in August, with new orders and hiring declining as trade tension weighed on business confidence, which could renew fears of a sharp economic slowdown.

Other data on Tuesday showed construction spending barely rising in July. Data on consumer spending had suggested that while the economy was slowing, it was not losing momentum as rapidly as financial markets were flagging.

The Institute for Supply Management (ISM) said its index of national factory activity dropped to a reading of 49.1 in August from 51.2 in July. A reading below 50 indicates contraction in the manufacturing sector, which accounts for about 12% of the US economy. August marked the first time since August 2016 that the index broke below the 50 threshold.

August’s reading was also the lowest since January 2016 and was the fifth straight monthly decline in the index. The ISM said there had been “a notable decrease in business confidence,” adding that “trade remains the most significant issue, indicated by the strong contraction in new export orders.” Economists polled by Reuters had forecast the ISM index would slip to 51.0 in August. The year-long US-China trade war is eroding business sentiment, with business investment contracting in the second quarter for the first time in more than three years.

That, together with an inventory bloat, is undercutting manufacturing, with output declining for two straight quarters.

Weak manufacturing and business investment are offsetting some of the boost to the economy from strong consumer spending.

A new round of US tariffs on imports of Chinese goods, mostly consumer products like clothing, footwear and televisions, took effect on September 1. These duties are expected to slow consumer spending. Additional US tariffs are due to be imposed in December.

With trade tension still simmering in the background, the US Federal Reserve is expected to cut interest rates again in September to keep the longest economic expansion in history on track.

The Fed lowered its short-term interest rate by 25 basis points in July for the first time since 2008, citing trade tensions and slowing global growth. Financial markets have fully priced in another quarter-percentage-point cut at the Fed’s September 17-18 policy meeting.

The ISM’s forward-looking new orders subindex dropped to a reading of 47.2 in August, the lowest level since June 2012, from 50.8 in July. A gauge of factory employment tumbled to 47.4, the weakest reading since March 2016, from 51.7 in July.

Manufacturing employment is being closed watched after the workweek dropped to its lowest level since November 2011 in July and factories cut overtime.

US stock indices extended losses after the data. Yields on US treasuries tumbled while the dollar was slightly stronger against a basket of currencies.

Reuters