US manufacturing activity drops to weakest level since financial crisis as tariffs bite

• A key gauge of US manufacturing activity dropped to its weakest level since the global financial crisis in December.
• The fifth straight month of declines came as a tit-for-tat trade dispute between the Trump administration and China dragged on.
• New orders and production both weakened sharply.
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A key gauge of US manufacturing activity dropped to its weakest level since the global financial crisis in December as a tit-for-tat trade dispute between the Trump administration and China dragged on.

The Institute for Supply Management said Friday that its index fell to 47.2 last month, a low not seen since June 2009, as new orders and production both weakened sharply. Economists had expected the index would come in at 49. Readings below 50 indicate contraction.

"This is a seriously weak report, and we see little chance of a sustained near-term recovery," said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

The ISM manufacturing index has contracted for five straight months. The sector slipped into a mild recession as trade tensions exacerbated a broader cooldown in factory activity.

The Trump administration announced an interim agreement to defuse planned escalations against China in October, but tariffs were kept on a majority of shipments between the two sides.

"Global trade remains the most significant cross-industry issue, but there are signs that several industry sectors will improve as a result of the phase-one trade agreement between the US and China," said Timothy R. Fiore, the chair of ISM.

As he campaigns for re-election, Trump has maintained his long-standing promise that tariffs would ultimately bring back factory jobs in the Rust Belt. Manufacturers saw a temporary boost in 2017 but have since faced higher prices and a muddled outlook from protectionism.

"Starting to see suppliers try to pass on costs associated with tariffs," one respondent said in the December ISM survey. "Uncertainty on the trade front continues to keep agricultural markets on the defensive."

In a December paper, Federal Reserve economists found that tariffs have hurt manufacturing employment and failed to increase output.

"We find that the 2018 tariffs are associated with relative reductions in manufacturing employment and relative increases in producer prices," the report said.