US manufacturing sector contracts for first time in 3 years

The U.S. manufacturing sector has hit a snag, contracting for the first time in three years, raising fresh concerns about the health of the U.S. economy.

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The ISM Manufacturing Index fell to 49.1 percent in August, down from 51.2 percent in July, as the U.S.-China trade war continued to cause uncertainty.

"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,” said Timothy Fiore, chair of the Institute for Supply Management. Tuesday’s reading was the first time in 35 months that the index fell below the expansion/contraction line of 50 percent. It has been weakening over the past four months.

“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." Readings for new orders, production and employment fell, while inventories increased, the report said.

Despite the pullback, former JPMorgan economist Anthony Chan tells FOX Business' 'Varney & Co', "It is not signaling a recession yet" noting a read of 46 would be more problematic.

In a tweet, Jay Timmons, president and CEO of the National Association of Manufacturers, said the slowdown, while not a surprise, renews calls for what is needed; passing USMCA, a trade deal with China and re-authorize the Export-Import Bank.

Since significant progress on any of those three initiatives is unlikely to happen before the Federal Reserve's next meeting, a contracting manufacturing sector could convince the policymakers to cut interest rates when it concludes a two-day meeting on Sept. 18. At last month's Jackson Hole Symposium, Fed Chairman Jerome Powell noted that trade policy uncertainty seemed to be "playing a role in the global slowdown and in weak manufacturing and capital spending in the United States."

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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CME Group data shows traders are currently pricing in a 90.4 percent chance the Fed lowers rates by 25 basis points to a range between 1.75 percent and 2 percent at the conclusion of its upcoming meeting this month.

Over in Europe, the manufacturing sector is in worse shape.

European manufacturing activity contracted for the seventh month in a row, data published on Monday revealed, with British factories posting the sharpest drop in output for seven years, reigniting fears about a global growth slowdown.

The PMI (purchasing managers’ index) showed that although eurozone manufacturing activity inched up slightly to 47 in August (up from 46.5 in July), it remained well within contraction territory. It marked the second-lowest reading since April 2013.

Only France, Greece and the Netherlands recorded any growth in new order books, while Germany continued to record the biggest monthly drop.