U.S. Manufacturing Slows as Trade War with China Continues

A recent index published by the Institute of Supply Management shows that in December 2019, American manufacturing activity contracted more than it had in the decade prior. On the Institute’s index, a reading below 50 indicates that the manufacturing sector is contracting; in December—the fifth month of contraction—the reading dropped to 47.2, the lowest since June 2009. President Trump signed an initial trade deal with China on January 15, but experts are concerned that it will only partially relieve the economic damage caused by the prolonged trade war.

Over the past two years, the Trump Administration has imposed tariffs on $360 billion of Chinese products. The January 15 trade deal leaves 25 percent tariffs in place on imported Chinese capital and intermediate goods. Although the tariffs have given American companies some protection from Chinese imports, the positive effects are seemingly outweighed by the higher prices that companies must pay to important components from China, as well as the retaliatory tariffs imposed on the U.S. in response. A recent study by two economists at the Federal Reserve found that, overall, the tariffs increased producer prices without raising manufacturing employment or output. In addition, the study found that manufacturing industries that were most exposed to tariff increases had shed more jobs than those industries that were less exposed.

The stall in American manufacturing has occurred primarily because of the trade war, global economic weakness, and a strong dollar, which makes American goods more expensive to purchase overseas. Federal Reserve officials do not anticipate this changing any time soon; in the minutes of their final meeting of 2019, they noted that “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.” Uncertainty on the trade front has discouraged companies from increasing their production in 2020.

Despite the trade uncertainly, consumer spending remains strong. With the newly signed trade deal and a strong consumer base, there may yet be a chance for stabilization of the manufacturing sector in 2020.

You can find the minutes of the Federal Open Market Committee’s December 2019 meeting here: https://www.federalreserve.gov/monetarypolicy/fomcminutes20191211.htm.

You can find the aforementioned 2019 Federal Reserve study here: https://www.federalreserve.gov/econres/feds/files/2019086pap.pdf.