A measure of U.S. manufacturing activity unexpectedly fell in May to the lowest level since October 2016, in a sign President Donald Trump's trade war with China is weighing on the economy as he considers further tariffs.

The Institute for Supply Management's purchasing managers index declined to 52.1 from 52.8, missing the median forecast of 53 in Bloomberg's survey but holding above the 50 mark that indicates expansion. Three of five components declined, including production, inventories and supplier deliveries, according to a report Monday.

The report follows signs from other major economies that trade tensions weighed on global manufacturing last month. U.K. manufacturing shrank for the first time in almost three years while gauges for China and South Korea both fell below the key 50 level. A separate report Monday showed the JPMorgan Global Manufacturing PMI fell to 49.8 in May, the weakest reading in data since mid-2016.

Key Insights

• The ISM index’s lowest reading of Trump’s presidency -- down from a 14-year high in August -- follows a slew of other economic data that suggest the sector was on shakier ground even before the latest escalation of tariffs between the U.S. and China began to pinch margins. A separate factory PMI released Monday by IHS Markit also fell, dropping to the weakest level since 2009.
• Producers, who already faced headwinds from slowing global growth and inflated inventories, may face additional fallout after Trump’s threat last week to impose tariffs on all imports from Mexico. Sustained weakness would dent economic growth and could be a factor that prompts the Federal Reserve to cut interest rates, as investors and some economists expect.
• ISM’s production gauge dropped to 51.3 in May, the lowest level since August 2016, even as the gauge of backlogs declined to a two-year low. At the same time, the measure for new orders increased, as did the employment gauge, a sign of possible stronger hiring in manufacturing ahead of the May employment report.
• The measure of exports increased, rising back above 50, while the imports gauge decreased for a third month to a two-year low of 49.4.
• An index of prices paid rebounded to 53.2, a sign that inflation could be beginning to pick up.
• A gauge of supplier deliveries dropped to 52. Readings below 50 indicate faster deliveries, while those above 50 signal slowing. The customer inventories index increased.
• The main ISM manufacturing gauge has held above the 50 line that divides expansion and contraction since August 2016.

Market Reaction

U.S. stocks advanced as investors weighed the weak manufacturing data and intensifying trade tensions. The S&P 500 climbed 0.2% as of 10:27 a.m. in New York after earlier falling as much as 0.5%. The yield on two-year Treasuries headed for its biggest two-day decline since January 2008 while the 10-year yield edged up to 2.11%.

Official’s View

“Respondents expressed concern with the escalation in the U.S.-China trade standoff, but overall sentiment remained predominantly positive,” Timothy Fiore, chair of ISM’s manufacturing survey committee, said in a statement. “Comments from the panel reflect continued expanding business strength, but at soft levels consistent with the early-2016 expansion.”