"Without any sort of catalyst to help turn the sentiment around we anticipate that continued weakness in the manufacturing sector is likely to bleed over into the consumer sector, which then can drag down the economy further," said Peter Donisanu, investment strategy analyst at Wells Fargo Investment Institute.
Consumer spending momentum typically follows the health of the manufacturing sector. August's weak manufacturing data is just the latest signal of a slowing economy. U.S. manufacturers also cut jobs last month, and business spending is falling.
"Businesses are holding back on spending because they're worried about not knowing what the rules of the game are, related to trade, said Jason Pride, chief investment officer for private wealth at Glenmede.
Meanwhile the Labor Department said manufacturing productivity suffered its worst performance in the second quarter since mid-2017. Taken together the data points to lagging demand that could eventually drag down consumer spending.
Signs of consumers' anxiety have already begun to appear. Retail sales, excluding auto purchases, were flat in August, according to the Commerce Department. Sales at restaurants and bars, an indicator of Americans' discretionary spending, fell 1.2% last month, the steepest drop in nearly a year. Sales at grocery stores, clothing retailers and furniture stores also fell. General merchandisers, which include chain retailers such as Walmart and Target, reported a 0.3% drop.
Meanwhile, consumer sentiment fell last month by the most in seven years, according to the University of Michigan's consumer sentiment index. Investors should keep a close eye on how the service sector, which makes up the bulk of the U.S. economy, reacts to the hurting manufacturing sector.
"We've seen cycles where manufacturing pulled back and services followed. When that occurred, we ended up in a more difficult economic environment," Pride said. For now the sector is holding up, even expanding at a stronger pace in August after two months of cooling.
For businesses and investors, much depends on how the trade feud between the U.S. and China plays out. The countries plan to meet in October to continue negotiations following months of escalating rounds of tariffs.
If the Trump administration's tariffs on Chinese imports lead, as expected, to higher prices on everything from toys to clothing and shoes, it could undermine consumer confidence even further, weakening the economy's last remaining support. Tariffs on many popular consumer items are scheduled to kick in on Dec. 15.