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Stock markets drop on news that U.S. manufacturing is shrinking

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  • U.S. manufacturing in August posted its worst reading since January 2016, showing that the sector is shrinking.
  • Stock markets responded by falling, led by heavy machinery makers and tech companies.
  • At the same time, new U.S. tariffs on Chinese imports went into effect September 1, suggesting further bad news for manufacturers.

U.S. factory activity shrank in August for the first time in nearly three years — a sign the trade war with China is weighing down a crucial sector of the economy. 

The news sent stocks dropping. The Dow lost 285 points, closing down 1%, at 26,118. The S&P 500 stock index lost 0.7%, falling to 2,906, and the tech-heavy Nasdaq composite fell 1.1%, to 7,874.

A monthly survey by the Institute for Supply Management, an association of purchasing managers, on Tuesday showed that factory production and new orders fell sharply in August and are even now contracting. U.S. manufacturers also cut jobs, the survey found. The data has fueled concerns that the broader U.S. economy is weakening.

The ISM's manufacturing index slid to 49.1 last month, from 51.2 in July. That's the lowest reading issued since January 2016. Any reading below 50 signals a contraction in the sector.

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A global softening in demand, worsened by an increasingly high-risk trade war between the U.S. and China, appears to be hurting American manufacturers. More than half of the public comments from the companies surveyed by ISM pointed to economic uncertainty as a drag on their businesses.

"A grim report" 

"This is a grim report," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The survey is not yet consistent with a steep downturn in the broader economy — manufacturing already has been contracting for two quarters — but another couple of months of declines on this scale would leave the U.S. facing an entirely unnecessary and self-inflicted recession."

Industrial stocks were among the biggest decliners Tuesday. Caterpillar, which is seen as an American bellwether when it comes to the impact of global trade and construction, fell 1.7%. Oil prices fell 2% and dragged energy stocks lower, with Chevron dipping 1.2%.

Technology companies, which are especially sensitive to tariffs and shifts in China trade, dropped also. Apple, which relies on China as a key part of its supply chain for iPhones, laptops and other devices, fell 1%. Chipmakers, which rely heavily on sales to China, came under pressure. Qualcomm sank 3.4%, and Nvidia lost 2%.

And now, more tariffs

On Sunday, the U.S. started charging a 15% tariff on about $112 billion of Chinese products. China responded by imposing tariffs of 10% and 5% on a list of American goods. U.S. markets were closed on Monday for Labor Day.

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Surveys of purchasing managers in several countries this week have suggested that the uncertainty generated by the trade war has hit manufacturers on a global scale.

While surveys of purchasing managers showed mixed results in China, manufacturing activity declined across Japan, Taiwan, and South Korea. In Europe, German manufacturing activity remained close to July's seven-year low, as new orders fell, producers scaled back output, and job losses rose steeply.

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