Published: Thu, September 05, 2019
Markets | By Otis Pena

Factories shrink for first time in 3 years amid trade war

Factories shrink for first time in 3 years amid trade war

Any PMI 50 percent or higher indicates manufacturing expansion. The new orders index fell to 47.2, down from 50.8 in July and the first time the gauge has dropped below 50 since December 2015.

In August, the ISM U.S. manufacturing Purchasing Managers' Index had dipped to 49.1 percent. A measure of new orders fell by 3.6 percentage points, a sign that output may continue to decline.

Timothy Fiore, chairman of the Institute for Supply Management's manufacturing business survey committee in the U.S., said, "Comments from the panel reflect a notable decrease in business confidence".

European stocks backed off from 1-month highs after the disappointing US PMI data fuelled worries of global economic softness, while uncertainty over Britain's hard exit from the European Union put an end to the FTSE 100's four-day winning streak.

The ISM tracks 18 manufacturing industries, and in August there were still nine industries reporting growth and seven industries reporting contraction.

Order backlogs also contracted in August for a fourth month.

The Inventories Index increased to almost 50 percent and the Prices Index to 46 percent. The Employment Index contracted a jarring 4.3 percent from July to 47.4 percent.

The Fed on July 31 cut its benchmark interest rate for the first time in over a decade and said it would be open to more rate cuts if needed.

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"Blame the trade war", remarked Ian Shepherdson, chief economist at Pantheon Macroeconomics, who earlier had blamed weakening manufacturing data on "the weakening of China's economic cycle, rather than the trade war".

"Last week's verbal pleasantries were for the gallery, and the cold reality is that both [U.S. and China] are digging in". In response, China filed an official complaint with the Worth Trade Organization and tagged tariffs to $75 billion worth of American goods, including a 5 percent crude oil tariff.

The ISM consults more than 300 executives within purchasing and supply chain management to collect the date for the purchasing managers index.

President Donald Trump said on Tuesday trade talks with China were going well, but he warned that he would be "tougher" if the discussions dragged on past the 2020 US election and he won a second term.

Anemic demand for USA goods, with persistent drops in export orders, produced a "notable decrease" in business confidence, as indicators for production, employment and order backlogs all fell, according to the Institute for Supply Management. "Overall, sentiment this month declined and reached its lowest level in 2019", says Timothy R. Fiore, chair of ISM's manufacturing survey committee. Asian stocks eased in early deals on Wednesday after poor U.S. economic data stoked fears of global recession, souring investor sentiment already hurt by heightened trade war concerns. The proposed United States-Mexico-Canada Agreement (USMCA) still needs congressional approval in order to replace the North America Free Trade Agreement (NAFTA).

In the US index, indicies for new orders, employment and production indices all declined in August from the previous month. The malaise is consistent with developments in the sector around the world.

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