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New York (AFP)

Manufacturing activity in New York State took a record dive this month and fell into contraction, suddenly reversing recent gains, the Federal Reserve Bank of New York reported Monday.

The surprising drop was another worrying sign for the US manufacturing sector, a day ahead of the start of a Federal Reserve meeting that comes as markets clamor for signs the central bank will cut interest rates soon to preserve economic growth.

Manufacturing has been a weak spot for the American economy this year as global demand slows and President Donald Trump pursues a multi-front trade war with some of America's largest trading partners.

However the survey coincided with Trump's recent threat to impose tariffs on Mexican imports in a battle over immigration policy -- threats he has since withdrawn for now.

"This looks awful but it won't last," Ian Shepherdson of Pantheon Macroeconomics said in a client note.

"President Trump tweeted the tariff threat on May 30 and abandoned it June 7. During that period, businesses appear to have panicked."

The Empire State Manufacturing Survey hit its lowest level since late 2016, reflecting steep drop-offs in new orders, order backlogs and employment, the regional reserve bank reported.

The general business conditions index of the Empire State Manufacturing Survey dropped a stunning 26 points to a reading of negative 8.6. Regional manufacturing surveys can be subject to volatility.

The Empire index was also in the red for much of the period between 2015 and 2017.

New York is the third-largest economy among US states but is only America's eighth-largest manufacturer, behind industrial powerhouses like California, Texas, Ohio and Illinois, Commerce Department data show.

- Mixed signals -

Similar indicators for the Chicago and Philadelphia regions rose in May and the Fed last week reported that nationwide US manufacturing had shown a mild uptick last month.

But this failed to offset a painful drop in April -- part of a string of weak results early in the year.

And, while it continues to show expansion, the closely-watched manufacturing index from the Institute for Supply Management slowed in May for the second straight month, confirming a downward trend.

Fed watchers do not expect the central bank to cut rates this week but policymakers have dropped hints they are inching closer toward what would be their first rate cut in more than a decade.

The Fed raised rates nine times over the last three and a half years as the economy recovered and put millions of Americans back to work. But Trump's aggressive tariff policies have shaken confidence and some central bankers have begun to acknowledge a chill in the air.

Meanwhile, the world's largest economy is sending mixed signals. Surveys of consumer confidence and business activity are running hot, unemployment is still near 50-year lows, and consumer spending continues apace.

But elsewhere the news has not been so good. Economic growth in the second quarter could be half the pace of the first and business investment has declined.

Trump has also warned he could jack up tariffs on another $300 billion in Chinese goods, something that would no doubt send shockwaves through the global economy.

And at the same time, recession indicators are flashing warnings, showing rising odds of a downturn in the next 12 months.

? 2019 AFP