U.S. Manufacturing Slumps as Trade War Damage Lingers

Manufacturing activity fell to its lowest level in more than a decade, a sign of fallout from President Trump’s trade war.

American manufacturing weakened in December, despite a trade truce with China and the resolution of a strike at General Motors last year.
American manufacturing weakened in December, despite a trade truce with China and the resolution of a strike at General Motors last year.Credit...Jeff Kowalsky/Agence France-Presse — Getty Images

WASHINGTON — American manufacturing activity contracted last month more than it had in a decade, data released Friday showed, a sign that economic damage from President Trump’s trade war could linger even after the United States and China sign an initial trade deal.

An index published by the Institute for Supply Management dropped to 47.2 in December, the lowest reading since June 2009 and the fifth straight month of contraction. A reading below 50 indicates the manufacturing sector is contracting.

The lackluster manufacturing data came amid growing concerns that Mr. Trump’s recent truce with China may only partly relieve economic damage from a prolonged trade war. Mr. Trump said Tuesday that the United States and China would sign an initial trade deal at the White House on Jan. 15, and that talks for a second-phase deal would begin “at a later date.”

The agreement will provide some relief to manufacturers and other businesses rocked by trade uncertainty, but it leaves the vast majority of Mr. Trump’s tariffs on Chinese goods in place. As a result, American manufacturers and other businesses that import parts and components from China will continue to pay higher costs to procure them.

“The premise that the manufacturing slump is over because of the phase-one deal is misguided,” Gregory Daco, the chief United States economist at Oxford Economics, wrote in emailed remarks. “Trade uncertainty remains elevated with tariffs on two-thirds of our imports from China, global activity remains soft, and the dollar remains strong.”

Mr. Daco added that “these headwinds will continue to restrain manufacturing output in 2020.”

Markets slumped as an American airstrike on an Iranian military commander also raised fears of escalating tensions in the Middle East. The S&P 500 closed down 0.7 percent. Brent crude, the global crude oil benchmark, jumped 3 percent to more than $68 a barrel.

Federal Reserve officials discussed manufacturing weakness at their final meeting of 2019, according to minutes released Friday. “Manufacturing production appeared likely to remain soft in coming months, reflecting generally weak readings on new orders from national and regional manufacturing surveys, declining domestic business investment, slow economic growth abroad and a persistent drag from trade developments,” the Fed said.

Mr. Trump has made reviving United States manufacturing his central economic mission, and the president embarked on a global trade war to help rewrite deals that he says put American workers at a disadvantage. Over the past two years, Mr. Trump has imposed tariffs on $360 billion worth of Chinese goods and placed levies on foreign steel and aluminum, washing machines, and solar panels.

But American manufacturing has stalled, damaged by the trade war, global economic weakness and a strong dollar, which makes American goods more expensive to purchase overseas. Since late 2018, factory output in the United States has slumped and new employment in the sector has leveled off.

The weakness in American factories has cooled the overall economy, which grew at an annual rate of 1.9 percent in the third quarter. But consumer spending, which accounts for a much larger proportion of the American economy, has remained robust.

“I think what we’re kind of finding is that the economy can continue to expand with a modest contraction in the manufacturing sector at the moment,” Charles Evans, the president of the Federal Reserve Bank of Chicago, said in an interview on CNBC on Friday. “The consumer is playing a strong role.”

Economists had hoped that the sector might rebound after the trade truce with China and the resolution of a major strike at General Motors in October. But the manufacturers that responded to ISM’s December survey said that export orders remained weak last month and that uncertainty on the trade front had discouraged companies from increasing their production.

“The manufacturing recession continues,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a note to clients. “The trade war is the only realistic explanation.”

He added, “The Phase 1 trade deal leaves 25 percent tariffs on imported Chinese capital and intermediate goods in place, and we see little chance of a comprehensive trade deal to remove them before November’s election.”

Mr. Trump and his supporters have insisted that the tariffs are necessary to protect American industry against unfair Chinese practices, including the forced transfer of American technology and illegal subsidies to Chinese firms. The administration argues that China’s practices have put American companies at a disadvantage and that tariffs can help level the playing field.

Jeff Ferry, the chief economist at the Coalition for a Prosperous America, a trade group that supports the tariffs, said the levies were achieving the administration’s goals. “They are supporting the sectors targeted, they are addressing national security issues, and they are increasing our independence from Chinese imports,” he said.

But many economists argue that the protective benefits of tariffs have been outweighed by negative effects. For example, tariffs make any products that manufacturers buy from abroad more expensive, increasing costs for American businesses and potentially making American products less competitive when sold overseas.

Tariffs have offered American companies some protection from Chinese imports, allowing them to gain a greater share of business in the United States, according to a study released Dec. 23 by two economists at the Fed, Aaron Flaaen and Justin Pierce. But those positive effects of tariffs are more than offset by the negative effects of the trade war, including the higher prices companies must pay to import components from China, and the retaliatory tariffs China placed on the United States in response, the economists said.

The researchers also found that the American manufacturing industries that were most exposed to tariff increases had shed more jobs than industries that were less exposed, though they do not find that the tariffs had a strong effect on industrial production.

Some might argue that the negative effects of tariffs are warranted if they protect the manufacturing sector, but the findings suggest the tariffs increased producer prices without raising manufacturing employment or output.

“While the longer-term effects of the tariffs may differ from those that we estimate here, the results indicate that the tariffs, thus far, have not led to increased activity in the U.S. manufacturing sector,” the economists said.

So far, tariffs imposed to protect the American metal and washing machine industries have had a mixed effect. In the steel industry, for instance, the protection against imports helped prompt United States producers to invest billions of dollars in new facilities that they hope will be more efficient.

But the price of steel plunged, in part as a result of lower demand from manufacturers, putting pressure on the steel makers. In December, United States Steel said it was going to indefinitely idle most of a mill near Detroit. Some 1,500 workers from the facility got layoff notices. U.S. Steel also cut its capital spending forecast for this year, to $875 million from $950 million.

The president of the Federal Reserve Bank of Dallas, Robert Kaplan, said economists at his branch expected some “stabilization” in manufacturing in 2020, though they still expect the sector to look “sluggish.”

Asked whether a significantly weaker manufacturing sector would require additional interest rate cuts — beyond the three moves that the Fed made in 2019 — Mr. Kaplan said, “It depends on what else is going on.” He added that he had been looking at factories along with weak global growth and business investment.

“Is that weakness sufficient to seep into other parts of the economy?” he said in an interview. “The jury is out on that right now, but my best judgment is — assuming we don’t get new trade news that’s negative — that we’ve got a chance to see some stabilization, and when you combine that with a solid consumer, we could have a solid year of growth in 2020.”

Thomas Barkin, president of the Federal Reserve Bank of Richmond, said in prepared remarks delivered in Baltimore on Friday that the calming policy-related tensions could help the economy.

“Business investment is an area I watch closely, and that I do worry about,” he said. “Between Brexit, the Middle East, immigration and the ongoing negotiations with China — to name just a few — it’s been a roller coaster both here and abroad.”

“In my view, the biggest boost to our economy would come from lessening the uncertainty and lowering the volume,” he said. “I’m hopeful recent events will lessen uncertainty and build confidence.”

Ana Swanson reported from Washington, and Jeanna Smialek from San Diego. Alan Rappeport contributed reporting from Washington, and Peter Eavis and Matt Phillips from New York.