US manufacturing sector contracts in August

The US manufacturing sector unexpectedly slipped into contraction territory in August amid escalating trade tensions between the US and China, according to the Institute for Supply Management.

The ISM's headline manufacturing index fell to 49.1 from 51.2 in July, missing expectations for a reading of 51.0 and below the 50.0 mark that separates contraction from expansion for the first time in three years.

The new orders index printed at 47.2 in August, down from 50.8 in July, while the production index fell to 49.5 from 50.8. The employment gauge came in at 47.4 from 51.7 in July and the prices index printed at 46 in August versus 45.1 the month before.

Chair of ISM Manufacturing Business Survey Committee, Timothy Fiore, said: "Comments from the panel reflect a notable decrease in business confidence. August saw the end of the PMI expansion that spanned 35 months, with steady expansion softening over the last four months.

"Respondents expressed slightly more concern about US-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders.

"Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019."

Ian Shepherdson, chief US economist at Pantheon Macroeconomics, said: "Yet again, the moral here is that the regional surveys, many of which were quite positive for August, don’t always capture the national story. This is a grim report, with the headline dipping below 50 for the first time since February 2016, when the crash in oil sector capex hammered manufacturing.

"This time, the story is China’s slowdown and the trade war, with the latter now the bigger problem, judging by the substantial and widening gap between the ISM new orders index - down to 47.2 from 50.8 - and China’s Caixin manufacturing PMI, which has risen by a couple of points from its January low.

"In short, we can find no good news here. The survey is not yet consistent with a steep downturn in the broader economy - manufacturing already has been contracting for two quarters - but another couple of months of declines on this scale would leave the U.S. facing an entirely unnecessary and self-inflicted recession."

Andrew Hunter, senior US economist at Capital Economics, said it looks as though a combination of weak global demand and escalating trade tensions are taking an increasing toll on US producers.

"While slower global growth has been the main headwind facing US manufacturers over the past 12 months, the press release highlighted that the renewed escalation of trade tensions with China is starting to weigh more heavily on sentiment.

"That will only reinforce the concerns of Fed officials over the impact of trade uncertainty on the economy, and provides another reason to think that another 25 basis points rate cut is coming at the FOMC meeting in two weeks’ time."