Dark Clouds Continue to Gather Over the U.S. Economy

August was the worst month for U.S. stocks in more than three years, and their slide continued as September begins. On Tuesday in New York, the Dow Jones Industrial Average was down 469.68 points, or just under three percent. The culprit is growing concerns about fundamental weakness in the American economy, exacerbated by the economic slowdown in China.

Data released Tuesday shows U.S. factories grew in August at the slowest pace since May 2013. The Institute for Supply Management said its index of national factory activity fell to 51.1 from 52.7 in July.  This is, in part, due to weaker demand from China and other emerging economies.

According to International Monetary Fund chief Christine Lagarde, the lack of demand for U.S. products from emerging markets isn’t likely to go away. On Tuesday, she downgraded the IMF’s global expansion outlook, further spooking world markets.

“This reflects two forces: a weaker than expected recovery in advanced economies, and a further slowdown in emerging economies, especially in Latin America,” Lagarde said in Jakarta.

Further adding to worries is an upcoming Federal Reserve policy meeting, set to open on Sept. 16. Fed Vice Chairman Stanley Fischer suggested at a weekend retreat in Wyoming that the U.S. Central Bank had not ruled out raising interest rates from around zero percent, a level at which they have stayed since 2006. If they go up, it would make it more expensive for consumers and businesses to borrow money, something that former U.S. Treasury Secretary Lawrence Summers fears could hurt the U.S. economy.

“Markets may have overemphasized China’s impact, but markets are also in relatively bad shape and we’re getting more negative technical signals,” Otto Waser, chief investment officer at R&A Research & Asset Management AG, told Bloomberg. “It’s a close call for the Fed and as long as markets are in turbulence.”

This all comes as China continues its slide. China’s official manufacturing purchasing managers index dropped to 49.7 in August from 50.0 in July, according to China’s Federation of Logistics and Purchasing. Any number below 50 indicates the Chinese manufacturing is contracting; it’s a three-year low for the index. This also triggered stock selloffs in Europe and Asia.

Things aren’t likely to calm down soon, according to the Chicago Board Options Exchange Volatility Index — also known as the “investor fear gauge” — which measures market turbulence. As the chart below shows, the index, known as the VIX, jumped 135 percent in August, its largest ever monthly increase. Notice the spike on August 24. That’s the day the Dow dropped 1,000 points and eventually closed down 588 points, or 3.57 percent.