Manufacturing Contracts in August as China Trade War Erodes Confidence

U.S. manufacturing contracted for the first time in three years, as the continuing China trade war eroded the robust manufacturing rebound of the last decade.

The Institute for Supply Management’s monthly PMI index fell to 49.1% in August, a drop of 2.1 percentage points from July and below the 50% threshold for manufacturing growth. The PMI had been above 50% since January 2016, when it registered a 48.0% reading, and was at 61.3%—or more than 20% above the growth level—in August 2018.

The index has fallen steadily since that time, and the August 2019 reading continued the trend that panel members say has been driven by overall economic uncertainty and specific concerns over the trade war with China.

“Comments from the panel reflect a notable decrease in business confidence. August saw the end of the PMI expansion that spanned 35 months, with steady expansion softening over the last four months,” said Timothy R. Fiore chairman of the Institute for Supply Management’s Manufacturing Business Survey Committee, in a press release. “Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. “Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019,” Fiore added.

Comments from ISM committee members were just as sharp. Among the comments:

• “Seeing some relief in the availability of electronic components in the marketplace, but there are still pockets of short supply, allocation, long lead times, and the like. Tariffs continue to be a strain on the supply chain and the economy overall.” (Computer & Electronic Products)
• “While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.” (Chemical Products)
• “Slowest month (July) this year so far in sales.” (Transportation Equipment)
• “Late planting of the corn and soybean crops has increased uncertainty over the final acres and yields. This is leading to volatile markets.” (Food, Beverage & Tobacco Products)
• "Slightly lower rate of incoming orders may be seasonal or a sign of a general slowdown. Monitoring closely." (Fabricated Metal Products)
• “Incoming sales seem to be slowing down, and this is usually our busiest season. Concerns about the economy and tariffs.” (Furniture & Related Products)
• “Business is starting to show signs of a broad slowdown.” (Machinery)
• “Generally, business remains steady. However, we continue to plan for a hard Brexit and a long trade war between the U.S. and China.” (Miscellaneous Manufacturing)
• “The market for large building structures is slowing.” (Nonmetallic Mineral Products)
• “Current business is OK, nothing to brag about. Under projections and slightly below last year, [but] margins are hanging in there.” (Plastics & Rubber Products)

The underlying PMI indexes also fell in August. The New Orders, Production, and Employment indexes all were below 50%, and the New Orders Index fell 3.6 percentage points—or almost 7%—to 47.2%.