U.S. manufacturing activity contracted for the first time in three years in August, with new orders and hiring declining sharply as trade tensions weighed on business confidence, raising financial market fears of a recession.

Concerns about the economy, which is in its longest expansion ever, were also exacerbated by other data Tuesday showing construction spending barely rising in July. The reports somewhat offset last week’s upbeat data on consumer spending that had suggested that while the economy was slowing, it was not losing momentum as rapidly as financial markets were flagging.

The U.S. economy’s waning fortunes have been blamed on the White House’s year-long trade dispute with China. U.S. President Donald Trump said Tuesday trade talks with China were going well, but he warned that he would be “tougher” in negotiations if the discussions dragged on past the 2020 U.S. election and he won a second term.

“The canary in the mine may be falling off its perch,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “With manufacturing now starting to contract, it is even more critical that the consumer keeps spending.”

The Institute for Supply Management (ISM) said its index of national factory activity dropped to a reading of 49.1 last month from 51.2 in July. A reading below 50 indicates contraction in the manufacturing sector, which accounts for about 12 percent of the U.S. economy. Last month marked the first time since August 2016 that the index broke below the 50 threshold.

August’s reading was also the lowest since January 2016 and was the fifth straight monthly decline in the index. The United States now joins the eurozone, Japan, the United Kingdom and China, which have long been experiencing a contraction in factory activity.

Still, the ISM index remains above the 43 level, which economists associate with a recession. The U.S.-China trade tensions also coincide with diminishing stimulus from last year’s US$1.5 trillion tax cut package.

The ISM said there had been “a notable decrease in business confidence,” adding that “trade remains the most significant issue, indicated by the strong contraction in new export orders.” Economists polled had forecast the ISM index would slip to 51.0 in August.

The U.S.-China trade fight is eroding business sentiment, with business investment contracting in the second quarter for the first time in more than three years. That, together with an inventory bloat, is undercutting manufacturing, with output declining for two straight quarters.

Consumers have largely shrugged off the trade dispute and continued to spend, propping up the economy. But that could change with the trade war spilling over to shopping malls.

A new round of U.S. tariffs on imports of Chinese goods, mostly consumer products like clothing, footwear and televisions, took effect Sept. 1. Additional U.S. tariffs are due to be imposed in December.

With trade tensions simmering in the background, the Federal Reserve is expected to cut interest rates again this month to keep the economic expansion, now in its 11th year, on track.

The Fed cut its short-term interest rate by 25 basis points in July for the first time since 2008, citing trade tensions and slowing global growth. Financial markets have fully priced in another quarter-percentage-point cut at the Fed’s Sept. 17-18 policy meeting. (SD-Agencies)