US Manufacturing Activity Sinks To Lowest Level Since 2009

WASHINGTON (AP) — U.S. factory activity hit its lowest level in more than a decade, as President Donald Trump's trade wars take a toll on American and global manufacturing.

The Institute for Supply Management, an association of purchasing managers, said Tuesday that its manufacturing index shrank for the second straight month to 47.8% in September, down from 49.1% in August. Any reading below 50 signals that the sector contracting.

Investors on Wall Street reacted immediately, as the reported slowdown in manufacturing fanned fears of weakening global growth. The Dow Jones Industrial Average, which was up this morning, plunged more than 200 points to 26,739, after the ISM report was released.

The nearly 15-month trade spat with China and tariffs on steel, aluminum and other products may have been intended to help US manufacturers. But it appears to be having the opposite effect, spurring the Federal Reserve cut interest rates by a quarter-point in September for the second time this year. Weakening business confidence and softening global demand have also hit American factories hard, prompting pullbacks in both production and employment. This month's measure reported the lowest level of manufacturing activity since June 2009, the last month of the Great Recession.

Fotios Raptis, senior economist at TD Economics, said that the entire U.S. economy could head toward a contraction if the index dropped even lower. He added that coupled with factory declines overseas, the global economy was also at risk next year.

"The U.S. economy is at the precipice of an economy-wide contraction in output," Raptis said.

President Donald Trump blamed the Federal Reserve for U.S. manufacturing's difficulties, arguing that the Fed's rate hikes last year pushed up the value of the dollar, which makes U.S. goods more expensive overseas.

"As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected," Trump said on Twitter. "Fed Rate too high. They are their own worst enemies, they don't have a clue. Pathetic!"

But the report suggests that global trade played a bigger role. Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee, pointed to the 2.3 percentage point drop in a measure of new export orders, its lowest level since March 2009. The ISM survey also includes comments from its members, and three of the 10 manufacturers quoted said that the tariffs are hurting their business. None blamed a strong dollar or the Fed. Most economists also point to the trade fight for manufacturers' problems.

"Simmering trade tension is the obvious culprit for the manufacturing weakness," said Eric Winograd, senior U.S. economist at AllianceBernstein.

"The trade war is wreaking havoc, to the point where the incipient upturn in manufacturing in China is not transmitting, at all, to the U.S.," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The trade war is also hurting economies around the world, as both trade and manufacturing are slowing at a pace close to the Great Recession. The World Trade Organization said Tuesday it expects volumes of traded goods to rise 1.2% this year, its weakest pace since 2009.

Surveys of purchasing firms compiled by the data firm IHS Markit pointed toward declines in manufacturing in South Korea, Japan, Indonesia and Malaysia, all export-reliant countries. The U.K. factory sector has also remained in negative terrain for five consecutive months, its longest stretch since the financial crisis.

Weakening production is spilling over to hurt the American workforce. The ISM survey indicates that more factory owners are considering cutting jobs than the prior month. Employment contracted at a faster rate in September, and one of the survey respondents said that lower demand for products ordered had prompted their company to cut 10% of its workforce.

Some economists also said that the ongoing union worker strike at General Motors could have played a role in a slower automotive market.

"That strike has now begun to affect production at suppliers too," said Paul Ashworth, chief US economist at Capital Economics. When the strike ends, we would expect the manufacturing sector surveys to rebound too."

Measures of production and employment slipped by 2.2% and 1.1%. New orders rose a slight 0.1% but remained in negative territory.

AP Economics Writer Christopher Rugaber contributed to this report.