American manufacturing activity contracted last month more than it had in a decade, a sign that economic damage from President Donald Trump's trade war could linger even after the United States and China sign an initial trade deal.
An index published Friday by the Institute for Supply Management dropped to 47.2 in December, the lowest reading since June 2009, and the fifth straight month of contraction. A reading below 50 indicates the manufacturing sector is contracting.
Minnesota and the region fared a bit better. Creighton University's Mid-America Business Conditions Index — which measures Minnesota, the Dakotas, Nebraska, Missouri, Kansas, Arkansas and Oklahoma — rose to 50.6 in December from November's 48.6. Minnesota's index slipped to 50.7 in December from 50.9 in November.
The region saw improvements in December sales and new orders. Delivery speeds of raw materials continued to grow but at a slower rate. Employment and export orders continued to show significant economic contraction, the Creighton report showed.
The lackluster national manufacturing data came amid growing concerns that Trump's recent truce with China may only partially relieve economic damage from a prolonged trade war. Trump said Tuesday that the United States and China would sign an initial trade deal at the White House on Jan. 15, and that talks for a second-phase deal would begin "at a later date."
The agreement will provide some relief to manufacturers and other businesses rocked by trade uncertainty, but it leaves the vast majority of Trump's tariffs on Chinese goods in place. As a result, American manufacturers and other businesses that import parts and components from China will continue to pay higher costs to procure the materials used in their products.
"The premise that the manufacturing slump is over because of the phase-one deal is misguided," Gregory Daco, the chief U.S. economist at Oxford Economics, wrote in e-mailed remarks. "Trade uncertainty remains elevated with tariffs on two thirds of our imports from China, global activity remains soft, and the dollar remains strong."
Daco added that "these headwinds will continue to restrain manufacturing output in 2020."
Federal Reserve officials discussed manufacturing weakness at their final meeting of 2019, according to minutes released Friday.
"Manufacturing production appeared likely to remain soft in coming months, reflecting generally weak readings on new orders from national and regional manufacturing surveys, declining domestic business investment, slow economic growth abroad, and a persistent drag from trade developments," the minutes said.
Trump has made reviving U.S. manufacturing his central economic mission, and the president embarked on a global trade war to help rewrite deals that he says put American workers at a disadvantage. Over the past two years, the president has imposed tariffs on $360 billion worth of Chinese goods and placed levies on foreign steel and aluminum, washing machines and solar panels.
But American manufacturing has stalled, damaged by the trade war, global economic weakness and a strong dollar, which makes American goods more expensive to purchase overseas. Since late 2018, factory output in the United States has slumped and new employment in the sector has leveled off.
The weakness in American factories has cooled the overall economy, which grew at an annual rate of 1.9 percent in the third quarter. But consumer spending, which accounts for a much larger proportion of the American economy, has remained robust.
"I think what we're kind of finding is that the economy can continue to expand with a modest contraction in the manufacturing sector at the moment," Charles Evans, the president of the Federal Reserve Bank of Chicago, said in an interview on CNBC on Friday. "The consumer is playing a strong role."
Economists had hoped that the sector might rebound following the trade truce with China and the resolution of a major strike at General Motors in October. But the manufacturers who responded to ISM's December survey said that export orders remained weak last month and that uncertainty on the trade front had discouraged companies from increasing their production.
"The manufacturing recession continues," Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a note to clients. "The trade war is the only realistic explanation."
Trump and his supporters have insisted that the tariffs are necessary to protect American industry against unfair Chinese practices, including the forced transfer of American technology and illegal subsidies to Chinese firms. The administration argues that China's practices have put American companies at a disadvantage and that tariffs can help level the playing field.
Jeff Ferry, the chief economist at the Coalition for a Prosperous America, a trade group that supports the tariffs, said that the levies were achieving the administration's goals. "They are supporting the sectors targeted, they are addressing national security issues, and they are increasing our independence from Chinese imports," he said.
Tariffs have offered American companies some protection from Chinese imports, allowing them to gain a greater share of business in the United States, according to a study released Dec. 23 by two economists at the Federal Reserve, Aaron Flaaen and Justin Pierce. But those positive effects of tariffs are more than offset by the negative effects of the trade war, including the higher prices companies must pay to import components from China, and the retaliatory tariffs China placed on the United States in response, the economists said.
The researchers also found that the American manufacturing industries that are most exposed to tariff increases have shed more jobs compared with industries that are less exposed, though they do not find that the tariffs had a strong effect on industrial production.
Some might argue that the negative effects of tariffs are warranted if they protect the manufacturing sector, but the findings suggest the tariffs increased producer prices without raising manufacturing employment or output.
"While the longer-term effects of the tariffs may differ from those that we estimate here, the results indicate that the tariffs, thus far, have not led to increased activity in the U.S. manufacturing sector," the economists said.