U.S. manufacturing activity shrank in August to its lowest level since January 2016, according to Tuesday’s Institute for Supply Management manufacturing index.
The ISM’s index of overall factory activity fell to 49.1 in August from 51.2 a month earlier. Economists had expected it to remain steady or slightly contract but to remain above 50.
Readings below 50 signal contraction. The last time the index signaled a contraction was January 2016, when the gauge fell to 48.
While the index indicates a contraction in manufacturing, at 49.1 it is not necessarily an indicator of a contraction in the broader economy. Manufacturing is about 12 percent of the U.S. economy and less than 10 percent of jobs. But becausae manufacturing jobs often come with higher wages, a decline in manufacturing can have an outsized drag on the overall economy.
New orders declined 3.6 points to 47.2. New orders for export fell to 43.3, five points lower than the previous month, indicating very weak demand internationally and reflecting the relative strength of the dollar against many foreign currencies. A stronger dollar makes U.S. exports more expensive for consumers whose income is paid in a foreign currency.
The sector is particularly susceptible to economic headwinds from the global economy because a sizeable portion of the demand for U.S. products comes from abroad.
“Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders,” said the survey’s chair, Timothy Fiore.
Employment and production also declined.
Prices paid to manufacturers also declined, indicating that disinflationary pressures. It also indicates that U.S. tariffs on Chinese goods have not pushed up prices on domestically manufactured goods, something that critics of the tariffs had claimed without evidence would be an inevitable result of what they describe as “protectionism.”
The report confirmed that U.S. manufacturing has joined the global trend of sluggishness and contraction. Similar surveys in Europe and Asia showed earlier that factory activity had hit the skids.
The below-50 figure for factory activity and evidence of disinflationary pressure make it all-but-certain that the Federal Reserve will reduce its interest rate target at the conclusion of its two-day meeting starting September 17.