Manufacturing Sector Contracts, Spurring Global Economic Fears

The US manufacturing sector contracted last month for the first time in three years. The report revitalized worries of an economic slowdown, sending bond yields tumbling. The stock market also felt the hit with the DOW closing down over 280 points and the S&P 500 down 0.69%. The trade war between Washington and Beijing weighed down the sector during the month of August. The news of the contraction circulated just after tariffs on an additional $112 billion of Chinese items took effect on Sunday, targeting everyday household items. These newly enforced tariffs will cost the average American household about $1000 dollars a year.

The ISM U.S. Manufacturing Purchasing Managers’ Index fell to 49.1% in August, the lowest reading in more than three years. Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, stated, “trade remains the most significant issue, indicated by the strong contraction in new export orders.” The trade war has negatively impacted the manufacturing sector with its tit-for-tat tariffs. The sector was once growing substantially under the Trump administration, notching big gains in employment and activity but has now fallen victim to administration’s diplomatic behavior.

The discouraging data has investors expecting the Fed to cut rates in their September meeting to help offset what is starting to seem like an economic slowdown. All eyes will be locked on the Fed’s next meeting as monetary policymakers will have to execute well in order to uphold their promise of sustaining the economic expansion. The August contraction ended the 35-month expansion period where the PMI averaged 56.5%.

Bank Stocks Decline

The contraction also raised concerns about demand for bank loans for everything from the housing market to the automobile industry. The KBW NASDAQ Bank Index of large commercial lenders fell 2.1% on Tuesday: Bank of America (NYSE:C) closed down over 1.7%, JP Morgan (NYSE:JPM) fell 1.15%, Citigroup slipped (NYSE:C) 1.45%, and Goldman Sachs (NYSE:GS) closed down 2.4%.

Marty Chavez, a Goldman Sachs executive who helped transform the firm’s technology division, announced that he will be leaving the financial institution. Chavez was the co-head of the bank’s trading division, and will be retiring at the end of 2019. He originally joined Goldman Sachs in 1993 in the J. Aron commodities trading division, and left after a few years to found a Silicon Valley start-up. He eventually returned to GS in 2005 and operated in many roles that integrated his technology prowess with trading and investments.

The benchmark 10-year US treasury note dropped to 1.462% on Tuesday from its previous level of 1.503% on Friday. Investors tend to track the financial sector because bank stocks are thought to reflect the health of the broader American economy.

Takeaway

The Trump administration’s trade war against China has started to weigh on the manufacturing sector, spurring more economic uncertainty. The tit-for-tat tariffs put an end to a 35-month expansion period in the manufacturing sector and dampened the already gloomy economic outlook. The latest tariffs put the consumer in a position where they will be thinking twice about investing in their endeavors which will hinder the lending banks. The manufacturing PMI and falling bond yields illustrate that the economy is heading toward some strong headwinds, leaving the Fed in a tight position at their upcoming meeting.

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