Minnesota and Midwest manufacturing slowed sharply in August

After more than 2 ½ years of growth, manufacturing in Minnesota and across the country contracted in August, sending stock markets on a broad slide.

The Institute for Supply Management (ISM), an association of purchasing managers, said Tuesday that its manufacturing index slid to 49.1 last month, from 51.2 in July, due to effects of the U.S.-China tariff war and slowdowns in the global economy. Any reading below 50 signals a contraction. That is the lowest number for the index since January 2016.

Creighton University's nine-state Mid-America Business Conditions Index fell to 49.3 last month from 52 in July, its lowest in 32 months. Minnesota's index fared even worse, falling from 51.7 to 48.6.

The contraction might not be a one-month dip either.

"Based on our manufacturing survey over the past several months, I expect overall growth to slow and potentially move into negative territory in the months ahead," said Ernie Goss, director of Creighton's Economic Forecasting Group.

More than half of the public comments from companies nationwide surveyed by ISM pointed to economic uncertainty as a drag on their businesses.

Investors have been worried that the trade war and a slowing global economy could tip the U.S. into a recession. The bond market has been reflecting these fears, with long-term bond yields falling below short-term ones, a so-called inversion in the U.S. yield curve that has correctly predicted previous recessions.

While consumer spending in the U.S. has remained strong, the deterioration in U.S. manufacturing could slow job growth and weaken the economy.

Timothy Fiore, chairman of the ISM's Manufacturing Business Survey Committee, said the decline in new orders was driven by the contraction in new export orders, which fell to their lowest since April 2009, when global trade was hit by the financial crisis.

"Tariffs are still weighing heavily on supply managers' minds as they adjust their supply or manufacturing sources," Fiore said. "Some industries can do it quickly, while others need more time."

Creighton's regional Mid-America Business Conditions Index tracks nine states including Minnesota, Iowa, the Dakotas, Missouri, Kansas, Oklahoma, Arkansas and Nebraska.

In July, the regional index was 52. Last month, that fell nearly 3 points as regional factories said they were wrestling with trade tariffs, slowing sales, plus decreased exports, employment, and business confidence.

Roughly 44% of Midwest supply managers said trade tariffs were their "greatest economic challenge for the next 12 months."

The Creighton report found that the "new export orders index" sank to a dismal 39.6.

That is down from July's 44.7. The region's "import index" also slumped, to 42.3 from 43.8 in July.

Many Minnesota-based manufacturers reported that the escalating U.S. trade war with China and other nations increased internal supply chain costs and disrupted supply flows. They responded by increasing product prices to offset higher costs. Aside from trade tariffs, a host of companies reported slowing product demand from customers in China, Japan and Europe.

3M, Graco, and H.B. Fuller all saw lackluster sales growth or falling profits during their recently reported second quarters.