The U.S. economy is expanding at a 2.6 percent annualized rate in the fourth quarter after a report Thursday that showed signs of weakness in U.S. manufacturing, the Atlanta Federal Reserve’s GDPNow forecast model showed.

This was slower than the 2.7 percent pace for fourth-quarter gross domestic product that the Atlanta Fed’s GDP program calculated on December 21. 

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2018 is 2.6 percent on January 3, down from 2.7 percent on December 21.

The nowcasts of fourth-quarter real consumer spending growth and fourth-quarter real private fixed investment growth decreased from 3.7 percent and 2.7 percent, respectively, to 3.6 percent and 2.4 percent, respectively, after Thursday morning’s Manufacturing ISM Report On Business from the Institute for Supply Management.

The next GDPNow update is Tuesday, January 8. 

Meanwhile, the report found that American factories grew last month at the slowest pace in more than two years, with some manufacturers complaining about the impact of President Donald Trump’s contentious trade policies, the Associated Press reported.

The Institute for Supply Management, an association of purchasing managers, said Thursday that its manufacturing index dropped to 54.1 in December, down from 59.3 in November and the lowest level since November 2016. Anything above 50 signals growth, and American manufacturing has been on a 28-month winning streak.

Still, the December drop — the biggest in a decade — was worse than economists had expected.

New orders, production and factory hiring all grew at a slower pace last month. Eleven of 18 manufacturing industries reported growth in December, led by textile mills and apparel makers.

Several respondents cited higher costs and uncertainty arising from Trump’s import taxes on steel, aluminum and hundreds of Chinese products. At the same time, the Chinese economy — the world’s second-biggest — is decelerating.

“This is grim,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a research note, adding that “the story here is that the trade war, coupled with China’s underlying slowdown, is wreaking havoc in both countries.”

Overall, the U.S. economy looks healthy. At 3.7 percent, the unemployment rate is near a 50-year low. Growth clocked in at a brisk annual pace of 3.4 percent from July through September.

For his part, President Donald Trump on Wednesday played down the stock market’s drop at the end of 2018, calling it a “glitch” and saying the market will again go up once various trade deals are settled, Reuters reported.

Trump, speaking to reporters at a cabinet meeting, sounded upbeat about negotiations to reach a trade deal with China, saying they are coming along very well.

The United States and China are about one month into a 90-day pause in implementing tariffs and other measures in a trade war that dominated much of 2018, as they work on hammering out a deal.

U.S. trade deals with Canada and Mexico also await congressional approval.

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