US manufacturing contracts for first time since 2016

The US manufacturing sector contracted for the first time in three years, data on Tuesday showed, as the US-China trade war has weighed on the industrial economy and added to fears about slowing domestic growth.

The Institute for Supply Management’s index fell 2.1 percentage points to 49.1 last month, missing expectations for a reading of 51.1, according to economists surveyed by Thomson Reuters.

This marked the first time since August 2016 that the index fell below 50, indicating a contraction. The index also fell to its lowest level since January 2016.

The details of the report were ugly as well with new orders, export orders, production and employment sub-indices all contracting last month.

“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,” said Timothy Fiore, chief of the ISM manufacturing business survey committee. “Respondents continued to note supply chain adjustments as a result of moving manufacturing from China.”

Wall Street had already been lower on Tuesday amid uncertainty over the next steps in US-China trade tensions as the latest batch of tariffs imposed by the world’s largest economies took effect on Sunday.

Stocks extended their losses following the manufacturing data, with the S&P 500 down 1 per cent, while Treasuries extended their rally. The yield on the US 10-year fell 6.2 basis points to 1.4439 per cent, while that on the two-year slid 7 basis points to 1.4360 per cent. Yields move inversely to price.

Uncertainty around trade relations between Washington and Beijing has sharpened concerns about global growth.

Markets have priced in additional rate cuts from the Federal Reserve this year, which already lowered rates in July. However, Fed chair Jay Powell has noted that fitting trade uncertainty into its policy framework was “a new challenge” and said that setting trade policy was “the business of Congress and the administration, not that of the Fed”.

The decline in the official manufacturing gauge followed a release by IHS Markit late last month that showed America’s factory sector contracted in August.

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