U.S. manufacturing shrinks for first time in 3 years

factory manufacturing

A strong U.S. dollar and a slowing global economy is hurting American manufacturing.

The U.S. manufacturing sector shrank in November for the first time in three years, according to the Institute for Supply Management (ISM). The ISM index hit 48.6% last month -- anything below 50% means the sector contracted. The November reading is the lowest it's been since 2009.

"Manufacturing is being pummeled by the stronger dollar and the weakness of global demand," says Paul Ashworth, chief U.S. economist at Capital Economics, a research firm. But Ashworth says the news isn't an indication of a looming U.S. recession.

The ISM index has declined for five straight months now.

Only five of the 18 manufacturing sectors in the U.S. actually grew.

It's a grim confirmation that the headwinds of the global economic slowdown are hurting factories and plants across the country.

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First, the U.S. dollar continues to get stronger against most of the world's major currencies. A strong dollar means that products made in the U.S. and sold abroad are becoming more expensive, and less attractive, to international buyers.

As the dollar has gained value, U.S. exports have fallen 6% so far this year compared to the same time a year ago, according to the Census Bureau.

Second, the global economic slowdown centered around China's economy has cut back economic growth in many countries that buy U.S. goods. Many of those countries have export a lot of their raw material to China.

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If emerging markets like Brazil, Malaysia and Turkey don't have much of an appetite for American products, that hurts manufacturing here.

The manufacturing contraction comes at an interesting time for the U.S. economy. The Federal Reserve could likely raise interest rates in two weeks for the first time in almost a decade. But historically, the Fed has not raised rates when the manufacturing index has been in the red. The manufacturing news only complicates the picture for the Fed.

Other parts of the economy are showing signs of resiliency, and the latest pulse on the U.S. job market comes Friday with the November jobs report. Still, the manufacturing decline raises concerns, some say.

"This report will add to fears that weakness in manufacturing will spread," says Jim O'Sullivan, chief U.S. economist at High Frequency Economics, a research firm.

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