June 21, 2019 / 5:01 PM / 2 months ago

Soft U.S. factory activity darkens economic outlook

WASHINGTON (Reuters) - U.S. manufacturing activity barely grew in early June and the service sector cooled, signs that President Donald Trump’s trade war with China could be weighing on the economy.

FILE PHOTO: A line worker checks frames for imperfections at Nissan Motor Co's automobile manufacturing plant in Smyrna, Tennessee, U.S., August 23, 2018. REUTERS/William DeShazer/File Photo

Other economic data released on Friday showed a rise in home resales during May, suggesting the Federal Reserve was seeing dividends from its efforts to avert a recession by keeping interest rates low.

While many indicators still point to a healthy economy, Fed policymakers are increasingly concerned that the 10-year economic expansion could be in danger.

Data firm IHS Markit said its U.S. manufacturing purchasing managers index (PMI) declined to a reading of 50.1 in early June, the lowest level since September 2009. A reading above 50 indicates growth in the manufacturing sector, which accounts for about 12% of the U.S. economy.

The data firm’s PMI for the U.S. services sector dropped to 50.7, the lowest since February 2016. Both the manufacturing and the service sector readings were below expectations of analysts polled by Reuters.

“It is likely that the news on trade policy has weighed on business sentiment and activity,” Daniel Silver, an economist at JPMorgan, said in a note to clients.

The U.S.-China trade war began last year and escalated last month after Trump, who has vowed to rebalance the global trading system in favor of the United States, raised tariffs on $200 billion in Chinese imports.

China, one of the top U.S. trading partners, responded by increasing its tariffs on a revised $60 billion list of U.S. goods.

Trump has threatened to slap tariffs on another $300 billion in Chinese imports if Beijing doesn’t agree to a trade deal soon. He has said he plans to meet Chinese President Xi Jinping next week at a Group of 20 nations summit in Japan.

All three major U.S. stock indexes were trading in a tight range on Friday as investors focused on a report that U.S. Vice President Mike Pence had said there were signs of progress with China on trade.

The trade tensions are widely believed to have been a factor in the Fed’s policy shift this week. Fresh projections released with the latest policy statement on Wednesday showed nearly half of Fed policymakers expect to cut interest rates this year.

Fed Chairman Jerome Powell told reporters on Wednesday that business uncertainty had risen since May, and that the Fed would act promptly if needed to keep the economy growing.

In early June, some two-thirds of all manufacturers attributed some or all of their raw material cost increases to tariffs during the month, said IHS Markit economist Chris Williamson, referring to the details of his firm’s surveys of purchasing managers.

The Fed already had made clear earlier this year that it was pausing the rate-hike campaign it began in 2015.

That led to a drop in mortgage interest rates.

Resales of U.S. homes rose 2.5% in May to a seasonally adjusted annual rate of 5.34 million units, the National Association of Realtors reported on Friday.

Reporting by Jason Lange; Editing by Paul Simao

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