August 1, 2019 / 12:37 PM / 18 days ago

U.S. manufacturing struggling as tariffs bite; job market healthy

WASHINGTON (Reuters) - U.S. manufacturing activity slowed to a near three-year low in July and hiring at factories shifted into lower gear, suggesting a further loss of momentum in economic growth early in the third quarter as trade tensions between Washington and Beijing persist.

FILE PHOTO: An assembly line worker works on the production line at Renegade RV manufacturing plant in Bristol, Indiana, U.S., April 16, 2019. REUTERS/Tim Aeppel/File Photo

Other data on Thursday showed the number of Americans filing for unemployment benefits rose last week, while construction spending fell sharply in June as investment in private projects tumbled to its lowest level in 1-1/2 years.

The slowdown in factory activity and accompanying weak business investment have caught the attention of Federal Reserve officials. The U.S. central bank on Wednesday cut interest rates for the first time since 2008, to insure against downside risks to the economy from trade tensions and slowing global growth.

Fed Chairman Jerome Powell told reporters during a news conference that the preemptive monetary policy easing was “not the beginning of a long series of rate cuts.” Powell described manufacturing as “not growing much,” saying “we hope to help that with this rate cut.”

The Institute for Supply Management (ISM) said its index of national factory activity slipped to 51.2 last month, the lowest reading since August 2016, from 51.7 in June. It was the fourth straight monthly decline in the index. The ISM said “trade remains a significant issue.”

A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12% of the U.S. economy. Economists polled by Reuters had forecast the ISM index rising to 52.0 in June.

“For a Fed concerned that the trade war is inflicting major wounds on business investment and manufacturing, today’s reports will only nudge the needle toward another rate cut,” said Sal Guatieri, a senior economist at BMO in Toronto.

The United States’ trade war with China has hurt business sentiment. That, together with disruptions to supply chains caused by import tariffs, is weighing on manufacturing.

Manufacturing is also taking a hit from an inventory overhang, which has resulted in businesses placing fewer orders with manufacturers. A reduction in the production of Boeing’s (BA.N) MAX 737 aircraft, which was grounded in March after two fatal plane crashes in five months, is also a drag on activity.

The dollar firmed against a basket of currencies as investors continued to digest Wednesday’s rate decision and Powell’s comments. U.S. Treasury prices rose. Stocks on Wall Street were trading higher.

FACTORY EMPLOYMENT SLOWS

The ISM’s forward-looking new orders sub-index rebounded to a reading of 50.8 last month from 50.0 in June. A gauge of factory employment fell to 51.7, the lowest since November 2016, from a reading of 54.5 in June. That poses a downside risk to manufacturing payrolls in July.

The government is due to publish July’s employment report on Friday. According to a Reuters survey of economists, nonfarm payrolls likely increased by 164,000 jobs in July after surging by 224,000 in June. Manufacturing payrolls are expected to have risen by 5,000 jobs last month after advancing 17,000 in June.

Despite the persistent weakness, U.S. manufacturing is in relatively better shape compared to the rest of the world. Reports on Thursday showed factory activity contracted across Asia and Europe in July.

The ISM said nine industries, including wood, computer and electronic products and textile mills reported growth last month. Machinery, transportation equipment, and electrical equipment, appliances and components were among the nine industries reporting a contraction.

Machinery manufacturers said “business has slowed.” Electrical equipment, appliances and components makers said “general business trends are continuing to show signs of weakness resulting from tariffs and cost impacts of importing and exporting.”

Despite the economy shifting into lower gear, mainly as the stimulus from last year’s $1.5 trillion tax cut package fades, the labor market has remained resilient. The economy grew at a 2.1% annualized rate in the second quarter. Economists expect growth will slow to around a 1.5% pace in the third quarter.

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits rose 8,000 to a seasonally adjusted 215,000 for the week ended July 27.

Economists had forecast claims increasing to 214,000 in the latest week. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 1,750 to 211,500 last week.

“There have been a few periods earlier in the expansion in which claims filings were lower than what we have seen reported in recent weeks, and the trend in job growth likely has slowed to some degree,” said Daniel Silver, an economist at JPMorgan in New York. “But the claims data signal that any softening in the labor market is likely to be modest and don’t point to any sort of substantial downshift in activity.”

Job gains averaged 172,000 per month in the first half of this year, below the monthly average of 223,000 in 2018, in part because of a shortage of qualified workers. The economy needs to create roughly 100,000 jobs per month to keep up with growth in the working-age population. The unemployment rate is expected to have held steady at 3.7% in July.

In a third report on Thursday, the Commerce Department said construction spending dropped 1.3% in June, the biggest decline in seven months, after falling 0.5% in May.

Reporting by Lucia Mutikani; Editing by Andrea Ricci

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