The prolonged trade war between the United States and China is taking a toll on the manufacturing sector, which contracted for the first time since 2009, data show.
The U.S. manufacturing purchasing managers’ index (PMI) fell to 49.9 in August from 50.4 in July, according to IHS Markit. It is the first time the closely watched indicator has fallen below 50 since September 2009.
The decline is a sign that manufacturers are starting to feel the effects of the ongoing trade war. Sales of U.S. exports decreased at the fastest pace since August 2009, according to the report. When exports fall, manufacturers typically respond by reducing inventories and cutting production. Over time, that gloominess could lead manufacturers to trim jobs.
“Manufacturing companies continued to feel the impact of slowing global economic conditions,” Tim Moore, associate director of economics for IHS Markit said in a statement. “The continued slide in corporate growth projections suggests that firms may exert greater caution in relation to spending, investment and staff hiring during the coming months.”
The PMI index is based on a survey of manufacturers about production, output, orders, inventory, pricing and other factors. A score below 50 on the index signifies that the sector is contracting.
“If manufacturing isn’t in a recession, it is pretty close,” said Mark Zandi, chief economist for Moody’s Analytics.
A contraction in manufacturing can have large ripple effects across the economy, Zandi said. Factories that produce fewer goods tend to cut back on shipping and distribution, which affects transportation companies, warehouses, seaports and airports, he said.
Struggling manufacturers also have less need for business services such as accounting, media and advertising. And when factories reduce staffs, those workers cut back on spending, hurting retailers and service providers, Zandi said.
Manufacturing employment has been slow in recent months as the sector navigates tariffs and weak demand from abroad. The sector added 16,000 jobs in July, down from an average of 22,000 jobs added per month in 2018, according to the Labor Department. If the contraction persists, manufacturers may need to start cutting jobs, Zandi said.
Manufacturing output fell during the first two quarters of this year, entering a “technical recession,” according to data released last month by the Federal Reserve. But experts say it may not be time to worry, because the contraction is small and manufacturing accounts for only 10% of the U.S. economy.
Still, the PMI report is the latest sign of trouble in the economy, which is growing more slowly as the effects of President Donald Trump’s tax cuts wear off and business investment softens. Federal Reserve officials are divided on how to boost the economy and address the potential downsides of the U.S.-China trade war at a time when the economy is showing general signs of strength, including an unemployment rate near 50-year lows.
The Congressional Budget Office said Wednesday that the federal deficit will grow by $800 billion more than expected over the next 10 years, deepening concerns that policymakers will not have as many options for boosting the economy if the U.S. falls into a recession.