Stock markets drop on news that U.S. manufacturing is shrinking

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(CBS).– U.S. factory activity shrank in August for the first time in nearly three years – a sign the trade war with China is weighing down a crucial sector of the economy.

The news sent stocks dropping Tuesday morning. The Dow lost 330 points, or 1.3%. The S&P 500 stock index lost 0.8% and the tech-heavy Nasdaq composite fell 0.9%.

The Institute for Supply Management, an association of purchasing managers, said Tuesday that its manufacturing index slid to 49.1 last month, from 51.2 in July. Any reading below 50 means a contraction, and August’s figure is the lowest for the index since January 2016.

A global softening in demand, worsened by an increasingly high-risk trade war between the U.S. and China, appears to be hurting American manufacturers. More than half of the public comments from companies surveyed by ISM pointed to economic uncertainty as a drag on their businesses.

An index measuring manufacturing production declined by 1.3 points, according to the ISM. Factories are also cutting jobs for the first time since September 2016, as the manufacturing-employment index fell 4.3 points to 47.4. A separate measure of new orders fell by 3.6 percentage points, a sign that output may continue to decline.

“This is a grim report,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “The survey is not yet consistent with a steep downturn in the broader economy – manufacturing already has been contracting for two quarters – but another couple of months of declines on this scale would leave the U.S. facing an entirely unnecessary and self-inflicted recession.”

Industrial stocks were among the biggest decliners Tuesday. Caterpillar, which is seen as an American bellwether when it comes to the impact of global trade and construction, fell 1.8%. Oil prices fell 3.5% and dragged energy stocks lower, with Chevron dipping 1.8%.

Technology companies, which are especially sensitive to tariffs and shifts in China trade, dropped also. Apple, which relies on China as a key part of its supply chain for iPhones, laptops and other devices, fell 1%, while chipmaker Nvidia fell 1.5%.

On Sunday, the U.S. started charging a 15% tariff on about $112 billion of Chinese products. China responded by charging tariffs of 10% and 5% on a list of American goods. U.S. markets were closed on Monday for Labor Day.

Surveys of purchasing managers in several countries this week have suggested that the uncertainty generated by the trade war has hit manufacturers on a global scale.

While surveys of purchasing managers showed mixed results in China, manufacturing activity declined across Japan, Taiwan, and South Korea. In Europe, German manufacturing activity remained close to July’s seven-year low, as new orders fell, producers scaled back output, and job losses rose steeply.

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