Manufacturers are mired in their deepest slump since the Great Recession

American manufacturers are sliding deeper into recession. A closely watched gauge of factory activity released on Tuesday registered its weakest reading in more than 10 years, weighed down by slowing global growth, the Trump administration's trade war with China and an ongoing strike by thousands of General Motors workers. 

The monthly survey by the Institute for Supply Management, an association of purchasing managers, showed that the sector — which accounts for roughly 12% of U.S. gross domestic product — in September shrank to its lowest level since since June 2009. Manufacturers are also adding fewer jobs. 

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A decline in international trade and demand for U.S. goods is the biggest factor denting manufacturers, according to ISM. One maker of electrical equipment and parts surveyed by the group also said that "tariffs have caused much confusion in the industry."    

In Louisiana, meanwhile, Gov.  John Bel Edwards on Tuesday blamed the sudden shutdown of a steel plant on tariffs. "While Bayou Steel has not given any specific reason for the closure, we know that this company, which uses recycled scrap metal that is largely imported, is particularly vulnerable to tariffs," he said.

The closure of LaPlace, Louisiana-based of Bayou Steel will cost 376 employees their jobs. 

Economy losing steam

The manufacturing report reignited fears of a recession, prompting U.S. stocks to erase gains and pushing the Dow down more than 300 points, or 1.2%. The broader S&P 500 and technology-heavy Nasdaq also both fell more than 1%. 

The slowing U.S. economy is "most noteworthy in the nation's factories," noted Jim Baird, partner and chief investment officer at Plante Moran Financial Advisors. "The worse news is that, at least for now, there is little reason to expect a resolution in the near term," added Baird, who cited ongoing uncertainty around trade policy and the related toll on business confidence and investment.  

Some economists marked down their forecasts for third-quarter economic growth because of ebbing demand for manufactured goods. Economists at Macroeconomic Advisers lowered their GDP estimate for the period by 0.1 percentage points to 1.6%. The economy has steadily lost momentum, declining from 3% in the first three months of the year to 2% in the second quarter. 

The slump also could put pressure on the Federal Reserve to further cut interest rates when policy makers meet in late October. The central bank has already trimmed its benchmark federal funds rate twice this year.

President Donald Trump took to social media to make that case on Tuesday, calling rates "too high" and writing that Fed Chair Jerome Powell and the central bank "allowed the dollar to get so strong, especially relative to all other currencies, that our manufacturers are being negatively affected." 

Reviving American manufacturing has been a key goal for Mr. Trump, who in 2017 approved steep corporate tax cuts designed to spur business investment. Last year, when the sector was adding an average of 22,000 jobs a month, the president touted the gains, describing manufacturing jobs as "among our best and most important."

But the sector added only 3,000 jobs in August amid a sharp pullback in hiring by manufacturers in recent months.

"The continued strength of the consumer means that a recession across the whole economy likely will be averted even as manufacturing suffering intensifies, but one-legged stools are never stable," Pantheon Macroecomics' Ian Shepherdson said in a note. "By the end of the year, the economy could easily be in the uncomfortable position that any modest shock to people's confidence — the hit from tariffs on consumer goods — will trigger a recession."   

Analysts also point to the continuing labor dispute between the United Auto Workers and GM as another hit to manufacturing. Now in its 16th day, nearly 50,000 hourly GM workers on Monday started collecting strike checks of up to $250. The walkout at some 55 GM plants around the country has prompted layoffs throughout the automotive supply chain. 

"Our guess is that this deterioration is at least partly due to the strike at General Motors," Paul Ashworth, chief U.S. economist at Capital Economics, wrote of the ISM factory numbers. "It also reflects the weakness of global conditions and reinforces our belief that, despite the hawkish protestations of some officials in recent days, the Fed will still cut interest rates by a further 25 basis points at December's FOMC meeting." 

The Associated Press contributed to this report.