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January 3, 2019 11:00 AM, EST

Factory Gauge Tumbles by Most Since 2008 as Orders Cool

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A gauge of U.S. manufacturing plunged last month by the most since October 2008, a fresh sign of deceleration in the economy amid global strains across the sector. U.S. stocks extended declines and Treasury yields fell after the report.

The Institute for Supply Management index dropped to a two-year low of 54.1, missing all estimates in Bloomberg’s survey, data showed Jan. 3. All five main components declined, led by new orders slumping the most in almost five years and the steepest slide for production since early 2012. Employment, delivery and inventory gauges fell, and ISM said just 11 of 18 industries reported growth in December, the fewest in two years.

The index compiled from a survey of manufacturers has tumbled sharply from a 14-year high in August, though it remains above the 50 dividing line between expansion and contraction. The 5.2-point drop from the prior month has been exceeded just twice this century, both times during recessions: in the financial crisis a decade ago and following the Sept. 11, 2001, terror attack.

Such weakness adds to signs that President Donald Trump’s trade war and a fading lift from fiscal stimulus are weighing on American producers. Previous reports showed five Federal Reserve indexes of regional manufacturing all slumped in December, the first time they’ve fallen in unison since May 2016.

Signs of trade-related spillovers in the world’s largest economies and other export-oriented nations are multiplying.

Factories Graph

China’s official factory gauge has fallen into contractionary territory, and a global manufacturing index from JP Morgan Chase & Co. and IHS Markit dropped to the lowest level since September 2016. On Jan. 2, Apple Inc. cut its revenue outlook for the first time in almost two decades, citing weaker demand in China.

The Jan. 3 ISM report showed a gauge of imports fell to the lowest since May 2017, while an export orders index climbed from an almost two-year low for its first gain in three months.

The measure of new orders fell to 51.1 while the reading for production dipped to 54.3, both the lowest since 2016. The index of supplier deliveries slumped to a one-year low of 57.5, indicating bottlenecks remain but are easing.

Gloomier data may give Fed policy makers, who already have said they intend to slow the pace of interest-rate hikes, more reason to pause. Ahead of the ISM report on Jan. 4, Dallas Fed President Robert Kaplan said the central bank should put rates on hold as it waits to see how uncertainties about global growth, weakness in interest-sensitive industries and tighter financial conditions play out.

Meanwhile, the ISM gauge of prices paid fell to 54.9, the lowest since June 2017. While that may largely reflect the recent plunge in oil, it adds to signs of contained inflation that provide little urgency for Fed rate hikes.