US factories show signs of trouble; labor market still firm

WASHINGTON: Activity is contracting in the US manufacturing sector but the number of Americans filing applications for unemployment benefits fell last week, signs that factories are suffering from a global slowdown even as the broader labor market remains healthy.

IHS Markit on Thursday said its Flash Purchasing Managers' Index (PMI) for manufacturing fell to 49.9 earlier this month from 50.4 in July, pointing to a contraction in the sector for the first time since September 2009.

Readings below 50 point to reductions in activity and the August data could heighten fears the US economy is on track to slip into recession, dragged down by economic weakness overseas and an escalating trade war with China.

IHS Markit said its surveys also pointed to slowing growth in the US service sector.

"August's survey data provides a clear signal that economic growth has continued to soften in the third quarter," said Tim Moore, an economist at IHS Markit.

A manufacturing survey from the Kansas City Federal Reserve showed its composite index slipping to -6 in August, the lowest reading since March 2016, from -1 in July.

Over 55% of survey respondents said they expected the most recent US tariffs on Chinese goods to hurt their business, while less than 6% expected a positive impact. More than a third expected trade tensions to persist for one to two years.

While US factories are feeling the pinch from weaker orders overseas and higher input costs due to rising US tariffs on imports, the labor market remains buoyant, providing a support for consumer spending.

JOBLESS CLAIMS FALL

Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 209,000 for the week ended Aug. 17, the Labor Department said in a separate report. The decline was sharper than expected.

Last week's claims data falls during the same week the Labor Department conducts surveys used to estimate national employment during the month of August. The four-week average for new unemployment benefits claims was lower than the corresponding week in July, a positive signal for employment during the month.

While hiring has cooled, the pace of job gains remains well above the roughly 100,000 needed per month to keep up with growth in the working-age population.

A separate index of leading economic indicators rose in July, pointing to continued economic growth in the coming months. The index, compiled by the Conference Board, had declined in May and June but increased 0.5% last month, boosted by healthy readings for permits to build housing, robust stock prices and low levels of unemployment claims.

Despite these signs of economic health, investors remain concerned about recession risks. The yield on 2-year Treasury securities dipped below the yield for 10-year securities again on Thursday, a development widely viewed as a classic recession signal.

Concerns over the impact of the trade tensions between Washington and Beijing on the US economic expansion, the longest on record, prompted the Federal Reserve to cut interest rates last month for the first time since 2008.

At the same time, minutes of last month's Fed policy meeting released on Wednesday suggested policymakers were divided over the cut and did not want to give the appearance that they were planning further rate reductions.

Investors are awaiting guidance on future policy from Fed Chair Jerome Powell who is due to speak at a conference on Friday.

On Thursday, Philadelphia Federal Reserve President Patrick Harker said he did not see an immediate need for another interest rate cut. After his comments, US stock prices turned negative.