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 and U.S. stocks swung to losses as the group’s production gauge slipped to a 10-year low. The employment measure also dropped to the lowest since January 2016, 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 may add to calls for the Federal Reserve to cut interest rates further. 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.
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.
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.
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 ISM’s index of prices paid remained below 50, suggesting muted inflationary pressures. Order backlogs declined, while the customer inventories index increased.
Elsewhere on Tuesday, another U.S. manufacturing purchasing managers’ index showed improvement. 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.