US Factories Shrink as Result of Weak World Demand, Trade Tensions

Aug. 22, 2019
Retail remains healthy, but trade tensions and weak global demand contribute to industry shrinkage.

Bigger cracks are forming across America’s manufacturing foundation as lackluster global demand and persistent trade tensions led to the first contraction in U.S. factory activity since September 2009.

The IHS Markit manufacturing Purchasing Managers’ Index slipped to 49.9 from a final July reading of 50.4, according to a preliminary August report Thursday that trailed all estimates in Bloomberg’s survey of economists. Fifty is the dividing lines between expansion and contraction. The reading for the U.S. follow others from Europe and Japan that showed shrinking factory activity.

The U.S. data underscore the challenge of a bifurcated economy faced by Federal Reserve Chairman Jerome Powell and his colleagues -- a battered manufacturing sector, beset by global fragility and trade tensions, and an invigorated American consumer powered by still-robust employment and incomes.

The IHS Markit’s gauge of manufacturing has declined five points since this year’s peak in January, according to the report which also showed the largest contraction in a decade for domestic orders and bookings from abroad.

The figures surface ahead of Powell’s opening remarks Friday at the central bank’s annual Jackson Hole symposium. Comments from other Fed officials indicate the difficult task Powell has in delivering financial markets a consistent message about changing monetary policy.

Kansas City Fed Bank President Esther George, in an interview with Bloomberg Television aired Thursday, said the economy doesn’t need lower interest rates.

“When I look at where unemployment is and I look at where inflation is right now, I think we’re in a good place as long as the consumer can continue to pull the economy forward,” George said.

U.S. stocks fell after Fed officials, including George, cast doubt on further interest-rate cuts and as traders assessed mixed economic data. Treasuries fluctuated.

A week ago, the Commerce Department reported that retail sales rose by the most in four months. The fifth-straight advance indicates Americans, buoyed by plentiful jobs and wage gains, remain comfortable spending. A separate release Thursday showed applications for jobless benefits at a four-week low.

Earnings from companies such as Walmart Inc. and Target Corp. have also signaled consumers’ strength.

At the same time, a factory gauge from George’s district showed the worst contraction in activity since March 2016. Furthermore, Fed officials must keep in mind the risk that the retrenchment in manufacturing will spill over into the broader economy. The IHS Markit gauge of business at U.S. service providers fell to 50.9 from 53 in July and matched the lowest since February 2016.

Thursday’s U.S. factory reports follow other preliminary IHS Markit data showing manufacturing shrank again in Germany and Japan, while stabilizing in France. The German manufacturing sector shrank for an eight consecutive month, underscored by a more than 25-point decline in a gauge of output prospects over the last two years.

“The survey’s output data haven’t changed enough to dispel the threat of another slight contraction in GDP in the third quarter, especially given the deterioration in the forward- looking indicators,” Phil Smith, an economist at IHS Markit, said in a statement.

Japan’s manufacturing sector contracted for the fourth month, while in France, the index reversed to show tepid growth.

U.S. business expectations for the year ahead reached the lowest level in data back to July 2012, the IHS Markit data showed.

Sluggish global demand is causing service firms to cut prices at the same time input costs weaken. A measure of prices charged contracted by the most since records began in October 2009.

by Alex Tanzi

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