The major domestic equity indexes were lower on Tuesday as concerns grew over global growth prospects after the latest data indicated that factory activity shrank in August for the first time since 2016. To complicate matters, both the United States and China imposed new tariffs on each other over the weekend.
So it was not much of a surprise that investors moved out of riskier assets as the latest round of tariffs and the lack of a date for a resumption of U.S.-China talks gnawed at any hopes for a resolution to the long-running trade war, which has rattled markets for months and weighed on world economies.
Compounding the uncertainty, the Institute for Supply Management said early in the day that its index of national factory activity dropped to 49.1, compared with a reading of 51.1 estimated by analysts polled by Reuters.
Earlier in the day data showed British construction companies last month suffered the sharpest drop in new orders since the financial crisis amid Brexit jitters.
The trade-sensitive industrials index fell 1.4%, making for the largest percentage loser among the S&P 11 major sectors, while the technology sector index fell 1.3%, weighed down by companies with a large revenue exposure to China. The Philadelphia Semiconductor index was down 1.8%.
Boeing fell 2.7% providing the largest drag for the Dow Jones Industrial Average after the Federal Aviation Administration said on Friday a global panel of experts will need a few more weeks to finish its review of the company’s 737 MAX certification.
Casino operators felt the brunt of slowing economic growth in China as gambling hub Macau posted weak August casino revenue. Shares of Las Vegas Sands, Wynn Resorts and MGM Resorts International all fell between 2% and almost 4%.
The only sectors that gained ground were the utilities index, rising 1.8%, the real estate index, up 1.3% and the consumer staples index up 0.5%.
Approximately 6.72 billion shares changed hands on the major domestic equity exchanges, as compared to the 6.99 billion share average over the past 20 trading days.
Manufacturing activity contracted for the first time in three years in August, with new orders and hiring declining sharply as trade tensions weighed on business confidence, raising financial market fears of a recession.
Matters were exacerbated by other data on Tuesday showing construction spending barely rising in July. The economy’s waning fortunes have been blamed on the White House’s year-long trade war with China.
The Institute for Supply Management (ISM) said its index of national factory activity fell to a reading of 49.1 last month from 51.2 in July. A reading below 50 indicates contraction in the manufacturing sector, which accounts for about 12% of our economy. Last month marked the first time since August 2016 that the index broke below 50.
August’s reading was also the lowest since January 2016 and was the fifth straight monthly decline in the index. The United States now joins the euro zone, Japan, the United Kingdom and China, which have long been experiencing a contraction in factory activity.
Still, the ISM index remains above the 43 level, which economists associate with a recession. The U.S.-China trade tensions also coincide with diminishing stimulus from last year’s $1.5 trillion tax cut package.
The ISM said there had been “a notable decrease in business confidence,” adding that “trade remains the most significant issue, indicated by the strong contraction in new export orders.”
The U.S.-China trade fight is eroding business sentiment, with business investment contracting in the second quarter for the first time in more than three years. That, together with an inventory bloat, is undercutting manufacturing, with output declining for two straight quarters.
A new round of U.S. tariffs on imports of Chinese goods, mostly consumer products like clothing, footwear and televisions, took effect on Sept. 1. Additional U.S. tariffs are due to be imposed in December.
The ISM’s forward-looking new orders sub-index hit a reading of 47.2 last month, the lowest level since June 2012, from 50.8 in July. A measure of export orders plunged 4.8 points to the lowest level since April 2009.
The survey’s factory employment fell to 47.4, the weakest reading since March 2016, from 51.7 in July. This raises the risk that factory payrolls contracted in August. Manufacturers cut hours in July, pushing the factory workweek to its lowest level since November 2011. Factories also cut overtime in July.
The ISM said nine industries, including furniture and related products, machinery and chemical products reported growth last month. Transportation equipment, primary metals and electrical equipment, appliances and components were among the seven industries reporting a contraction.
Machinery manufacturers said, “business is starting to show signs of a broad slowdown.” Electrical equipment, appliances and components makers complained that “tariffs continue to be a strain on the supply chain and the economy overall.”
That sentiment resonated across all industries. Manufacturers of furniture and related products said, “incoming sales seem to be slowing down, and this is usually our busiest season.”
In a separate report on Tuesday, the Commerce Department said construction spending edged up 0.1% in July. Data for June was revised up to show construction outlays decreasing 0.7 instead of falling 1.3% as previously reported. Construction spending fell 2.7% on a year-on-year basis in July.