Economic Report: U.S. manufacturers experience worst month since 2007-2009 Great Recession, ISM finds

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Bloomberg News/Landov

Employees prepare jet engine components using liquid nitrogen at the General Electric Co. assembly plant. American manufacturers face tougher times owing to a U.S. trade war with China and a slowing global economy.

The numbers: American manufacturers posted the biggest contraction in September since the end of the 2007-2009 recession, reflecting a slowdown in the U.S. and global economies made worse by a tense trade war with China.

The Institute for Supply Management said its manufacturing index fell to 47.8% last month from 49.1%, marking the lowest level since June 2009. That’s when the Great Recession ended.

Economists surveyed by MarketWatch had forecast the index to total 50.2%.

The sharp decline in the index raised the specter of recession, wiping out early Wall Street gains and sending stocks lower. Readings over 50% signal business conditions are getting better, below 50% indicates they are getting worse.

President Trump quickly took to Twitter to blast the Federal Reserve again, blaming the central bank for keeping U.S. interest rates too high.

Some economists also believe interests rates are too high, though they say the ongoing trade war is the biggest culprit.

What happened: Production, employment and inventories all declined in September. The index for new orders actually rose a tick to 47.3%, but it’s still at the weakest level in a decade.

Another bad sign: Only three of the 18 U.S. manufacturing industries tracked by ISM reported growth, down from nine in the prior month.

“Chinese tariffs going up are hurting our business. Most of the materials are not made in the U.S. and made only in China,” said an executive at a food and beverages manufacturer.

“Economy seems to be softening. The tariffs have caused much confusion in the industry,” said an executive at a company that makes electrical equipment.

A three-week strike at General Motors GM, -1.83%  likely contributed to the poor index reading, but it’s unclear how much. Comments from executives suggested the manufacturing industry’s weakness goes deeper.

Read: Chicago PMI contracts for third time in four months

A similar manufacturing survey by IHS Markit, meanwhile, registered 51.1 in September.

What they are saying? “Manufacturing weakness is close to dangerous levels. Historically, readings under 46 are consistent with recession,” said senior economist Chris Low of FTN Financial. “Manufacturing is a small part of the economy, but it is a vitally important one, producing income and multiplier effects, especially in the Midwest.”

Big picture: Manufacturers at home and abroad have faced waning demand and more canceled orders as they struggle to cope with a global economic slowdown, exacerbated in part by the trade war between the world’s two largest economies.

Manufacturing is a much smaller part of the economy than it used to be, but there are signs the industry’s slump is spreading to the larger service sector. So far the damage appears to be contained, but there’s growing worry it will get worse unless the U.S. and China strike a deal or at least ratchet down tensions.

Market reaction: The Dow Jones Industrial Average DJIA, -0.73% and S&P 500 SPX, -0.55% fell in Tuesday trades, surrendering early gains after the poor ISM report.

The 10-year Treasury yield TMUBMUSD10Y, -2.48% sank to 1.65% from as high as 1.74% earlier Tuesday morning.