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A measure of U.S. manufacturing unexpectedly fell deeper into contraction, posting the weakest reading since the end of the last recession as a global slowdown and the U.S.-China trade war increasingly weigh on the sector.
The Institute for Supply Management’s factory index slipped to 47.8 in September, the lowest since June 2009, according to data Tuesday. The figure missed all estimates in a Bloomberg survey that had called for an increase from August’s 49.1.
Treasury yields plummeted, the dollar erased gains and U.S. stocks swung to losses after the report. The group’s production gauge slipped to a 10-year low while the employment measure also dropped to the lowest since January 2016. That’s a worrying sign before a jobs report Friday that’s forecast to show private payroll growth remains subdued.
The second straight reading below 50 -- the line separating expansion and contraction -- extends the drop from a 14-year high just over a year earlier and raised concern about a recession even after two straight interest-rate cuts from the Federal Reserve. Slowing global growth has damped demand for manufactured goods at home and abroad while trade policy uncertainty has disturbed supply chains and put hiring plans on hold.
Recent manufacturing data “make you worried that this could spread from the manufacturing sector to the services sector,” said Torsten Slok, chief economist at Deutsche Bank AG. “When the employment report comes on Friday we will have an even better idea on whether this is just a manufacturing issue or whether this is something that not only continues to deteriorate but is also spreading.”
The group said just three of 18 industries reported growth in September, the lowest total since April 2009. Contracting industries were led by apparel, leather and allied products; printing and related support activities; and wood products. The only expansions were in miscellaneous manufacturing; food, beverage and tobacco products; and chemical products.
ISM’s measure of new orders, considered a leading indicator of downturns, edged up slightly to 47.3 from an August reading that matched the weakest of this expansion. The production index declined to 47.3, while the inventories gauge fell to 46.9, the lowest since late 2016.
ISM’s trade gauges showed American producers are struggling with headwinds from abroad as well as the effects of a resurgent dollar. The measure of export orders, a proxy for overseas demand, fell to 41, the lowest level since March 2009, while the imports index remained in contraction.
The overall gauge will probably continue to be subdued unless there’s a pickup in new orders, Timothy Fiore, chair of ISM’s manufacturing survey committee, told reporters on a call. “The single biggest way to do that is to open up the new export orders,” he said. “There needs to be some relaxation here in trade.”
What Bloomberg’s Economists Say
“A sub-50 ISM does not imply overall recession in the U.S. -- a sub-44 ISM would. However, there is little reason to believe that conditions are due to deteriorate to that extent for domestic production.”-- Andrew Husby and Carl RiccadonnaClick here to read the full note.
While manufacturing makes up just over a tenth of gross domestic product, slowing in the sector combined with cooler business investment and economic growth puts the longest-ever American expansion in a more precarious position. Greater weakness may threaten President Donald Trump’s re-election prospects in 2020.
Shortly after the report, Trump renewed his attacks on the Fed and Chairman Jerome Powell, saying they “allowed the Dollar to get so strong,” hurting manufacturers. Fed officials “don’t have a clue” and are “pathetic,” the president tweeted.
Supplier deliveries was the only sub-index above 50, which for that gauge indicates slower deliveries. A Fed measure of production already signaled U.S. manufacturing is in a recession when it contracted in the first half of this year.
The pullback in the employment gauge, to 46.3 from 47.4, comes amid economist projections that the main monthly Labor Department report Friday will show limited manufacturing payroll growth. Economists forecast a 3,000 gain in factory employment for a second month.
Elsewhere, reports this week have shown China’s factory sector contracted for a fifth month in September. The euro area’s manufacturing slumped as German factories experienced their worst month since the depths of the financial crisis.
The latest disappointing data add to a growing pile of evidence of further dimming in the global economic outlook. The International Monetary Fund, already projecting a 3.2% growth pace this year that would be the slowest since the financial crisis, will release an updated estimate later this month as policy makers from across the world gather in Washington for the fund’s annual meeting.
The report was “quite weak, consistent with significant export-led weakening in manufacturing continuing,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd., said in a note. But it may still be too early for alarm, as “so far at least, the less-export-oriented non-manufacturing parts of the economy have remained reasonably solid,” he wrote.
U.S. factories could be set to take another hit. The United Auto Workers union called its first national strike against General Motors Co. since 2007 midway through the month, halting production at the carmaker’s dozen assembly plants and 22 stamping, powertrain and parts factories. The work stoppage has spilled over to effect suppliers including American Axle & Manufacturing Holdings Inc., which has temporarily laid off staff.
A separate U.S. manufacturing purchasing managers’ index showed improvement on Tuesday. The gauge from IHS Markit rose to 51.1 from 50.3, with employment at the best reading since May and new orders up from the prior month. Analysts expected a level of 51, equal to the preliminary reading.
(Updates with economist’s comment in fifth paragraph, Bloomberg Economics box.)
--With assistance from Chris Middleton and Craig Trudell.
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