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US factory activity unexpectedly fell in August for the first time since January 2016.

The contraction came as the US-China trade war continued to reduce demand for products from American manufacturers.

The Institute for Supply Management's purchasing managers index — a closely tracked gauge of US manufacturing — slumped to 49.1 last month.

The US and China both slapped fresh tariffs on billions of dollars' worth of imports on Sunday.

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US manufacturing activity dipped in August for the first time in three years as domestic manufacturers continued to grapple with the fallout from the US-China trade war.

The Institute for Supply Management said on Tuesday that its closely watched purchasing managers index slid to 49.1 in August, a level lower than any analysts expected, according to Bloomberg. A reading below 50 typically indicates that growth in the manufacturing sector is weakening.

The ISM consults more than 300 executives within purchasing and supply-chain management to collect the data for the purchasing managers index.

"Comments from the panel reflect a notable decrease in business confidence," Timothy Fiore, the chair of the ISM's Manufacturing Business Survey Committee, said in a press release.

"Respondents expressed slightly more concern about US-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders," Fiore added.

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The institute's new-order measure dropped to a seven-year low, suggesting that tariffs are dampening demand for new products from US producers. That index fell to 47.2, down from 50.8 in July. It's the first time the gauge has dropped below 50 since December 2015.

The concerning readings came two days after the US and China imposed a new round of tariffs on billions of dollars' worth of products in the latest escalation of the trade war. It also joins a growing number of signs that the US could be headed for a recession.

The US economy expanded slower than originally thought in the second quarter. IHS Markit said its preliminary gauge of US manufacturing activity fell for the first time a decade in August. And the University of Michigan's consumer-sentiment index last month posted its sharpest drop in more than six years.

A widely followed segment of the so-called yield curve, which tracks the spread between yields on short- and long-dated Treasurys, inverted several times in August. Investors often view the occurrence as a harbinger of an economic downturn, as it has preceded every recession since 1950.

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