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U.S. manufacturing closed out a tumultuous year with the weakest monthly performance since the end of the recession, with orders shrinking and factories continuing to dial back production in December.

Stocks and Treasury yields, already lower after a U.S. airstrike killed one of Iran's most powerful military leaders, extended declines after the report.

The Institute for Supply Management's purchasing managers' index fell to 47.2 in December from 48.1, missing estimates for a rise in a Bloomberg survey of economists, according to a report Friday. It was the worst reading since June 2009 and marked the eighth decline in the past nine months.

Any reading below 50 signals contraction -- and the index has been below that crucial level since August. The new orders, production and employment components of the index were all negative. But other components of the index -- such as a jump in prices -- suggest that the setback for manufacturing has bottomed out, said Tim Fiore, chairman of the institute's manufacturing business survey committee.

"We've probably seen the worst of it behind us," Fiore said.

December's deterioration was driven by the weakest gauges of new orders and production since April 2009. The data shows American factories remain plagued by pullbacks in business investment at home, softer demand throughout the world and, until recently, an escalating trade war between the U.S. and China.

"Trade issues remain an issue for supply managers," Fiore said. "I think that unplanned factory closures and extended holiday periods had a part to play on the production side and likely the employment side."

Fifteen of the 18 manufacturing industries reported contraction in December, led by apparel and wood products. Just three reported expansion: food, computers and a category the association labeled as "miscellaneous."

The below-50 reading contrasts with IHS Markit's purchasing managers' index, which eased slightly to 52.4 in December but remained near a seven-month high. The nation's two most-watched manufacturing surveys pointed in different directions in November as well, underscoring disagreement among economists and investors on which index offers a more accurate picture of the sector.

The institute's index averaged a reading of 51.2 for all of 2019, also the lowest in a decade. That's down 7.6 points from 2018's average, the steepest drop since 2001.

One reason the institute's gauges of production and new orders may have trouble recovering quickly is Boeing's struggle with its 737 Max airplane. Boeing told its suppliers to suspend parts shipments starting in the middle of this month after the grounding of the aircraft. Fiore said Boeing's problems will probably be a drag on manufacturing for the next four to six months.

The institute's gauge of factory employment fell in December to the lowest level since January 2016, suggesting further softness in manufacturing hiring even as the rest of the jobs market remains broadly strong.

An index of prices paid showed input costs rising for the first time since May as the gauge of supplier deliveries held above 50.

Even so, economists expect the record-long U.S. expansion to continue in 2020 despite factories' malaise. A partial trade deal between the U.S. and China was announced Dec. 13, and President Donald Trump said this week that he will sign it Jan. 15.

The agreement will provide some relief to manufacturers and other businesses rocked by trade uncertainty, but it leaves the vast majority of Trump's tariffs on Chinese goods in place. As a result, American manufacturers and other businesses that import parts and components from China will continue to pay higher costs to procure them.

"The premise that the manufacturing slump is over because of the phase-one deal is misguided," Gregory Daco, the chief United States economist at Oxford Economics, wrote in emailed remarks. "Trade uncertainty remains elevated with tariffs on two-thirds of our imports from China, global activity remains soft, and the dollar remains strong." Daco added that "these headwinds will continue to restrain manufacturing output in 2020."

Markets slumped as a U.S. airstrike on an Iranian military commander also raised fears of escalating tensions in the Middle East. The S&P 500 fell 0.7% on Friday. Oil prices rose. Brent crude, the global crude oil benchmark, jumped 3.5% to more than $68 a barrel.

Federal Reserve officials discussed manufacturing weakness at their final meeting of 2019, according to minutes released Friday. "Manufacturing production appeared likely to remain soft in coming months, reflecting generally weak readings on new orders from national and regional manufacturing surveys, declining domestic business investment, slow economic growth abroad and a persistent drag from trade developments," the Fed said.

Trump has called reviving domestic manufacturing his central economic mission, and the president embarked on a global trade war to help rewrite deals that he says put American workers at a disadvantage. Over the past two years, Trump has imposed tariffs on $360 billion worth of Chinese goods and placed levies on foreign steel and aluminum, washing machines, and solar panels.

But American manufacturing has stalled, damaged by the trade war, global economic weakness and a strong dollar, which makes American goods more expensive to purchase overseas. Since late 2018, factory output in the United States has slumped and new employment in the sector has leveled off.

The weakness in American factories has cooled the overall economy, which grew at an annual rate of 1.9% in the third quarter. But consumer spending, which accounts for a much larger proportion of the U.S. economy, has remained robust.

"I think what we're kind of finding is that the economy can continue to expand with a modest contraction in the manufacturing sector at the moment," Charles Evans, the president of the Federal Reserve Bank of Chicago, said in an interview on CNBC on Friday. "The consumer is playing a strong role."

Information for this article was contributed by Reade Pickert of Bloomberg News, by Josh Boak of The Associated Press and by Ana Swanson and Jeanna Smialek of The New York Times.

A Section on 01/04/2020

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