The preliminary flash survey of purchasing managers from Markit Economics also showed that backlogs of work started to fall in September an ominous sign which could, if it persists, lead to lay-offs in workers and a further shrinking in U.S. manufacturing capacity.
Chris Williamson, Chief Economist at Markit, said growth had slowed to the point where the manufacturing sector may have even acted as a slight drag on the economy in the third quarter.
This suggests that manufacturings share of the U.S. economy has begun sliding again.
The greatest weakness is in exports, according to the survey, which recorded the sharpest decline in new export orders since October 2011.
U.S. manufacturers have fretted over the damage to exports caused by the euro zone crisis. The head of Illinois-based Caterpillar, the worlds biggest maker of earthmoving equipment, said recently that Europes economy may not show appreciable growth for another five years.
Closer to home, economists say manufacturing has been hit by tepid domestic demand, cooled by the prospect that the fiscal cliff will topple the U.S. into a double-dip recession by the end of the year. The fiscal cliff is the process by which spending is automatically cut and taxes are increased if there is no agreement between politicians over fiscal plans exerting a massive drag on demand.
Optimists say the euro zone crisis and fiscal cliff are short-term problems, rather than factors that will depress U.S. manufacturing over the long term. Pessimists counter that structural political problems on both sides of the Atlantic and the daunting mathematics involved in running down huge existing government debts even if there is a sudden political solution, have the potential to keep the U.S. and euro zone fiscal crises, if indeed both qualify as such, alive for many years. They could, therefore, wreak havoc on business and consumer sentiment and hence on U.S. manufacturing for much of the next decade.
Long-term pessimists about the U.S. manufacturing base can point to the progressive slide in manufacturings share of total U.S. gross domestic product (GDP) over the decades. The share has fallen fairly steadily from 22 percent in 1980 to 18 percent in 1990 and 13 percent in 2010, based on United Nations figures that look at GDP on a value-added basis. This is part of a general decline across most of the rich world: The descent has been even faster in the U.K. and Italy, and of a similar order to the U.S. even in Germany and Japan. However, the latter two countries manufacturing sectors remain proportionately larger because the decline started from higher levels.
The slide in the U.S. partly reflects the offshoring of production by U.S. multinationals from domestic factories to low-cost countries such as China which has benefited U.S. manufacturing stocks by allowing the multinationals to maintain margins even while they cut the price of finished goods. However, much of the shrinking share reflects business lost by U.S.-listed companies to manufacturers headquartered and listed in emerging markets. Small- and mid-cap manufacturers have often been particularly vulnerable to this.
Optimists about the long-term future of U.S. manufacturing can point to the increased demand from these very same emerging economies. The money they have made in producing goods for Western markets has turned them into major consumers of Western goods too. Asia was the destination for 27 percent of U.S. goods exports in July; the EU was responsible for only 16 percent. U.S. manufacturers high exposure to Asia is a trump card, since the region is likely to account for a huge proportion of growth in demand for manufactured goods in the coming decade.
Perhaps the single most exciting prospect for U.S. manufacturers lies not in tapping into growing demand from elsewhere, but in recapturing demand at home. Key to this is the recent global trend towards reshoring the return of manufacturing previously offshored to emerging markets back to domestic factories. This makes it easier for manufacturers to respond with lightning speed to changes in local demand. The economic penalty for doing this has been lowered by the rapid rise of Chinese wages and stagnation of workers earnings in the U.S. and other Western countries. Despite high-profile cases such as General Electrics return of production to the U.S. from China and Mexico, however, its not yet clear whether reshoring is anything more than a temporary phenomenon. Still, the U.S. remains the biggest consumer market in the world, so if reshoring does takes hold, U.S. manufacturing could be given a powerful backstop that could slow or even arrest its fall.
The S&P 500 was trading 0.2 percent lower at 1,458 in the U.S. midafternoon on Thursday, hit by the days string of bearish manufacturing surveys for the U.S., euro zone and China.
Markits U.S. manufacturing output index fell 0.7 points to 51.2, and backlogs of work fell by 2.5 points to 48.9. A figure above 50 indicates an expansion, with a number below 50 suggesting contraction.