Manufacturing slows amid international trade disruptions

By Gary Keith

In the latest sign of fallout from global trade tensions, U.S. manufacturing activity contracted in August for the first time in nearly a decade.   

The monthly purchasing managers index produced by the business intelligence firm IHS Markit declined to a seasonally adjusted 49.9 from 50.4 in July.  Index values below 50.0 indicate a contraction in output while values above 50 imply expansion.  

The pullback was driven by a decline in new orders, with new export sales falling at the fastest pace since August 2009.

The IHS survey was echoed by a similar poll conducted by the Federal Reserve Bank of New York.  

The monthly Empire Survey found statewide manufacturing conditions to be positive but relatively weak in August, with readings over the past three months falling to the lowest level since 2016.

The deceleration in industrial activity can also be seen in local payroll employment trends.

Rochester’s manufacturing job count declined by 1.1 percent in July—the fourth consecutive year-over-year contraction and the weakest stretch since the first quarter of 2018 (Figure 1).

While the impact of factory employment has declined in recent years, it remains an important contributor to household income and spending power.

In 2018, manufacturing workers accounted for $3.7 billion or 17 percent of the Rochester area’s total private payroll income—40 percent more than the U.S. average.

The outlook for manufacturing employment will likely remain cloudy, given continuing softness in U.S. export demand and the potential for higher input costs related to escalating import tariffs.

In the August Empire Survey, roughly 14 percent of manufacturers reported substantial increases in input costs due to tariffs, while 24 percent noted moderate cost increases.  

Should higher costs continue to hamper business sales and profits, the potential for further downward pressure on local and national manufacturing employment will likely intensify.

Gary Keith is vice president and regional economist at M&T Bank Corp.