Updated at 4:50 p.m. ET
Manufacturing activity shifted into reverse in August for the first time in three years, as factory owners adjusted to the ongoing trade wars. An index compiled by the Institute for Supply Management showed a decline in nearly every measure, including new orders, production and employment.
The index had been signaling a slowdown in manufacturing since April, but the August reading is the first to show an actual contraction of the factory sector since August of 2016.
"Trade remains the most significant issue," said ISM's Timothy Fiore, who compiled the index. Ongoing tensions with China and other trading partners led to a sharp drop in export orders, while also disrupting supply chains for factories that produce for customers here at home.
"While business is strong, there is an undercurrent of fear and alarm regarding the trade wars," one manufacturer in the chemical industry told ISM.
"Manufacturing is definitely impacted tremendously through uncertainty," said Lisa Winton, CEO of the Winton Machine company in Suwanee, Ga. "When we are shipping capital equipment and it has a four-month lead time, people want to know in four months when they're paying for that product that they're not going to have an additional tariff."
The manufacturing sector has added 517,000 jobs in the past three years. But the pace of growth has slowed substantially, from an average of 22,000 jobs per month last year to fewer than 8,000 jobs per month in the first seven months of this year.
The average factory workweek has also shrunk, according to the Bureau of Labor Statistics.
"People are laying off third- and second-shifts and going down to 32 hours or 34 hours. That doesn't seem so exciting," said Nicole Wolter, CEO of HM Manufacturing in Wauconda, Ill.
Manufacturing accounts for just over 8% of all the jobs in the U.S. And the sector is more sensitive than most to the effects of a global slowdown. The question for the broader economy is whether the slump will remain limited to the manufacturing sector or spread to the much larger services sector.
So far, the broader economy has been propped up by robust consumer spending. With low unemployment and steady if unspectacular wage growth, that could continue. But Gregory Daco of Oxford Economics said the factory slowdown could have spillover effects if it rattles consumers.
"The main channel is going to be via confidence that is gradually going to erode, as well as via financial markets, which have already started to show some initial signs of worry as the trade tensions have increased," Daco said.
A University of Michigan survey released last week showed tariffs have begun eating into consumers' confidence. And the Dow Jones Industrial Average tumbled 285 points — or more than 1% — on Tuesday.
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America's factories are in a slump. Manufacturing activity shrank last month for the first time in three years. Factories are particularly sensitive to slowing global demand, and the trade war with China isn't helping. While manufacturing is a relatively small part of the U.S. economy, its slump could be a warning sign for others, as NPR's Scott Horsley reports.
SCOTT HORSLEY, BYLINE: HM Manufacturing in Wauconda, Ill., makes a wide variety of products for companies ranging from food makers to the aerospace industry. CEO Nicole Wolter says most of her business is holding up well, but she has seen a slump in demand for the kind of pulleys and gears she sells to the auto industry.
NICOLE WOLTER: I can see that orders for that section have completely almost come to, like, a grinding halt.
HORSLEY: And orders aren't the only indicator of factory activity that are dropping. According to the Institute for Supply Management, which tracks the sector, measures of output and employment also fell last month. Wolter's employees are still working overtime, but the average factory workweek has been slipping.
WOLTER: People are laying off third and second shifts and going down to 32 hours or 34 hours. That doesn't seem so exciting.
HORSLEY: This downward trend didn't start overnight. Factories have been tapping the brakes since April, but August was the first time in three years that the index showed the manufacturing sector actually shifting into reverse. Gregory Daco of Oxford Economics says the slump looks like more than a momentary blip.
GREGORY DACO: Manufacturing activity is gradually not just cooling but also contracting. And if you look at some of the forward-looking components of the ISM index, businesses in general are not very optimistic about the outlook.
HORSLEY: An index of new orders was the lowest since 2012. Factory job growth has also slumped to less than half what it was last year. Factories are feeling the effects of slower growth in countries like Germany and China. On top of that, there's the trade war, which has thrown a monkey wrench into both imported supplies and exported products.
LISA WINTON: Manufacturing is definitely impacted tremendously through uncertainty.
HORSLEY: Lisa Winton runs the Winton Machine Company in Suwanee, Ga., which makes machines for fabricating metal tubes, the kind of things you might find in a refrigerator or outdoor furniture.
WINTON: There's just so many different things that have small, bent tubes on them, and we build the machines that cut, bend, form that tubing.
HORSLEY: Wolter says whenever the direction of the economy is uncertain, companies are reluctant to invest in that kind of equipment.
WOLTER: When we are shipping capital equipment and it has a four-month lead time, people want to know in four months when they're paying for that product that they're not going to have an additional tariff because that's not in their budget.
HORSLEY: The big question now is whether the slump in manufacturing will be confined to that sector. So far, the broader economy has held up pretty well, thanks in large part to robust consumer spending. But Daco says there's always a danger that factories' woes could spread.
DACO: And the main channel is going to be via confidence that is gradually going to erode as well as via financial markets, which have already started to show some initial signs of worries as the trade tensions have increased.
HORSLEY: A University of Michigan survey released last week showed tariffs had begun eating into consumers' confidence, and today the Dow Jones Industrial Average tumbled nearly 300 points.
Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.