Economy

USA manufacturing activity contracted in August

USA manufacturing activity contracted in August

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

"The canary in the mine may be falling off its perch", said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

So far, the broader economy has been propped up by robust consumer spending.

The Institute for Supply Management said the Purchasing Managers' Index for the month of August, fell 2.1 percent to 49.1 percent.

The U.S. manufacturing sector has hit a snag, contracting for the first time in three years, raising fresh concerns about the health of the U.S. economy. And a measure of new orders also fell below 50, a sign that output will likely remain weak in the coming months.

Sterling on Tuesday morning fell below $1.20, its lowest level since October 2016.

While surveys of purchasing managers showed mixed results in China, manufacturing activity declined across Japan, Taiwan, and South Korea.

Economists had expected the index to hold about steady at 51.3.

President Trump has urged American businesses to look for an alternative to China and bring their production facilities back home. "China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders", Timothy Fiore, Chair of ISM Manufacturing Business Survey Committee, said in a statement.

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Commenting on the data, "The ISM manufacturing index has come in at 49.1 for August versus 51.2 in July".

With US investors returning from the long Labor Day weekend, major equity indexes in the US started the day in the negative territory as the lack of progress in the US-China trade dispute revived concerns over the potential negative impact of a protracted trade war on the economy.

Manufacturing is technically already in a recession in the United States with a Federal Reserve measure of output declining in two consecutive quarters.

At the same time, new US tariffs on Chinese imports went into effect September 1, suggesting further bad news for manufacturers. Additional U.S. tariffs are due to be imposed in December.

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. Stocks on Wall Street fell, while the dollar .DXY was little changed against a basket of currencies. The New Orders Index registered 47.2%, a decrease of 3.6%age points from the July reading of 50.8%.

ISM's new export orders were down to their lowest level since April 2009 as well. Factories also cut jobs for the first time since September 2016.

Each of the report's key metrics, including the PMI, were down in August.

That suggests this Friday's employment report will show weakness in August manufacturing payrolls, which were surprisingly robust the previous two months. The latest escalation follows three months of stalled negotiations after China reportedly walked away from an agreement in May. Transportation equipment, primary metals and electrical equipment, appliances and components were among the seven industries reporting a contraction. This was said to be a positive sign for future expansion.

"Many respondents continued to note global trade softness as a reason for sluggish activity", Fiore said.