President Donald Trump’s trade war with China is supposed to lead to a renaissance for U.S. manufacturers, and a resurgence in hiring of American factory workers.
For now, though, U.S. manufacturers are going in the opposite direction.
A key gauge of U.S. factory activity fell into contraction levels last month, for the first time during Trump’s tenure.
The Institute for Supply Management’s manufacturing index slid to a reading of 49.1% in August from 51.2% in July. Economists had projected an August reading of 51.5%.
A reading below 50% indicates that the sector is in contraction. The gauge hadn’t dropped below that level since August 2016, during the runup to the presidential election.
Economists say that while the trade war is supposed to help U.S. industry become more competitive at the expense of Chinese manufacturers, many American firms are getting hurt by the prospect of higher costs for materials due to the import tariffs.
“This is a grim report,” Ian Shepherdson, chief economist for the forecasting firm Pantheon, wrote Tuesday.
Manufacturing accounts for just 12% of U.S. gross domestic product, so industry’s fate isn’t as closely linked to the overall economy as consumer spending, which accounts for about 70% of GDP.
But historically the industrial sector has produced some of the highest-paying blue-collar jobs, and negative headlines about factories closing or laying off workers can spoil consumer confidence, ultimately leading to them to cut back on spending.
According to the institute, the manufacturing survey wouldn’t typically indicate a recession in the overall economy until readings fall below 42.9%.
Economists at the U.K. bank Barclays wrote in an Aug. 30 report that they expect an eventual recovery or at least stabilization in U.S. manufacturing activity. But the risks to the broader economy are increasing.
A deepening industrial slump could “ultimately drag down labor markets and the related ability for households to consume and support the service sector.”