Empire State Manufacturing Contracts in August

Factory activity across New York state fell in August and producers signaled layoffs in the months ahead, the latest sign that many U.S. manufacturers are still facing weaker customer demand amid economic and political uncertainty.

The Empire State's business conditions index declined to -4.2 from 0.6 in July. The gauge has been swinging around the zero mark, which separates expansion from contraction, in recent months.

Economists surveyed by The Wall Street Journal expected the index to edge up to 2.5.

The Empire report is the first in this month's batch of regional factory surveys conducted by Fed banks, looked to by economists and investors for clues about the state of the nation's manufacturing sector.

While conditions across the country have improved in recent months, producers are still contending with softer demand from overseas, exacerbated by the strong dollar's effect on pricing, and with a sharp drop off in business investment. According to the most recent report on gross domestic product, businesses still aren't spending on capital investments. Nonresidential fixed investment fell at a 2.2% pace in the quarter, and equipment spending dropped for the fourth time in five quarters. Many firms have expressed caution ahead of the presidential election and Brexit's effect on exports, in addition to lingering economic headwinds.

In the New York report, firms said new orders rose slightly from July and shipments hit a 12 month high. But manufacturers reduced head counts, a trend they signaled would accelerate, and inventories continued to contract.

Looking ahead six months, factories across the state expressed ongoing optimism that conditions would pick up, but sentiment was more cautious than in recent months. A gauge of overall expectations slipped to 23.74 from 29.24 as firms pulled in demand expectations. Meanwhile, an index of future hiring slid seven points to -6.19, and producers reported sharp reductions in capital spending and technology investment plans.

"Actual business activity is OK but firms remain anxious, perhaps waiting to see how the aftermath of the Brexit referendum affects their export business," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com