US Manufacturing Shrinks for First Time in Three Years

September 3, 2019 Updated: September 3, 2019

WASHINGTON—U.S. 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.

Other data on Tuesday showed construction spending barely rising in July. Data on consumer spending had suggested that while the economy was slowing, it was not losing momentum as rapidly as financial markets were flagging.

The Institute for Supply Management (ISM) said its index of national factory activity dropped to a reading of 49.1 last month from 51.2 in July. A reading below 50 indicates contraction in the manufacturing sector, which accounts for about 12 percent of the U.S. economy. Last month marked the first time since August 2016 that the index broke below the 50 threshold.

August’s reading was also the lowest since January 2016 and was the fifth straight monthly decline in the index. The ISM said there had been “a notable decrease in business confidence,” adding that “trade remains the most significant issue, indicated by the strong contraction in new export orders.”

Economists polled by Reuters had forecast the ISM index would slip to 51.0 in August. The year-long U.S.-China trade war is eroding business sentiment, with business investment contracting in the second quarter for the first time in more than three years.

That, together with an inventory bloat, is undercutting manufacturing, with output declining for two straight quarters.

The ISM’s forward-looking new orders sub-index dropped to a reading of 47.2 last month, the lowest level since June 2012, from 50.8 in July. A gauge of factory employment tumbled to 47.4, the weakest reading since March 2016, from 51.7 in July.

Manufacturing employment is being closely watched after the workweek dropped to its lowest level since November 2011 in July and factories cut overtime.

U.S. stock indexes extended losses after the data. Yields on U.S. Treasuries tumbled while the dollar was slightly stronger against a basket of currencies.

By Lucia Mutikani