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August 1, 2019 12:00 PM, EDT

Factory Gauge Sinks to Lowest Since 2016 as Exports Drop

Factories Daniel Acker/Bloomberg News

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U.S. manufacturing activity deteriorated in July to an almost three-year low, dragged down by slower production and shaky export markets that help explain the Federal Reserve’s decision to reduce interest rates July 31.

The Institute for Supply Management’s index eased to 51.2 last month from 51.7 in June, according to data released Aug. 1. Figures above 50 signify expansion, and the median estimate in a Bloomberg survey of economists was for a July reading of 52. Measures of output, factory employment and input prices all declined during the month.

The fourth straight downturn in the overall index of factory activity, inching closer to outright contraction, is consistent with the recent trend of manufacturing weakness throughout the world. Producers are beset by a combination of tepid global economies and trade policies and tariffs that have left supply chains at some companies in disarray.

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While manufacturing makes up only about 11% of the U.S. economy, the risk is that further weakness will extend to service providers and prompt those companies to reduce investment and limit hiring, endangering the record-long expansion.

Details of the ISM’s report showed a gauge of production declined for the third time in four months, pushing a measure of manufacturing employment to its lowest level since November 2016.