The American manufacturing sector contracted last month, a key measure showed on Tuesday, heightening fears that the trade war with China could bring on a recession.
Manufacturing accounts for just 11 percent of the country’s gross domestic product, but it is often seen as a harbinger of what lies ahead for the economy. Stocks fell on Wall Street after the release of the report, from the Institute for Supply Management, with the S&P 500 index down about 1 percent by the early afternoon.
“Manufacturers are plainly panicking here,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “They’re pessimistic about the outlook.”
The institute’s manufacturing index was at 49.1 for August, down from 51.2 in July. Anything below 50 is considered a sign of contraction. The index is based on a survey of purchasing and supply managers.
Economists had expected the index to show a slight gain for August, making the drop all the more surprising and leaving the index at its lowest level since January 2016.
The manufacturing report follows several other indicators that have suggested economic weakness. On Wall Street, short-term bond yields now exceed the return offered by longer-term notes, a sign a recession could be coming.
The institute’s survey is essentially a measure of business confidence. The latest figure echoed a University of Michigan survey released last week that showed consumer confidence experiencing its biggest drop since 2012.
In a news release, the institute quoted several executives who attributed their anxieties to tariffs imposed on Chinese imports by the Trump administration. On Sunday, the United States placed a new 15 percent tariff on thousands of Chinese products, including some food and clothing items.
“While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession,” an unidentified executive with a chemical products company is quoted as saying. A computer and electronic products manager told the institute that “tariffs continue to be a strain on the supply chain and the economy overall.”
The Trump administration’s tariffs have affected many factory owners who depend on overseas suppliers for components and raw materials. And with Beijing imposing retaliatory tariffs on American goods, many manufacturers reliant on sales to China are feeling pain as well. All of this makes manufacturers more vulnerable to trade tensions than service-economy companies.
A reading below 50 on the institute’s survey hardly guarantees a recession, said Jim O’Sullivan, chief United States economist at High Frequency Economics. In 2016 and 2012, it dropped to that level and no recession followed.
Still, Mr. O’Sullivan said, the low reading was a cause for concern. “Trade is the main source of angst in the markets right now,” he said. “There’s no question about that.”