(Reuters) – A gauge of producing activity within the U.S. Mid-Atlantic region slid to the bottom in nearly two years in December, with latest orders and shipments each contracting in a sign the factory sector stays in a slump.

The Federal Reserve Bank of Philadelphia said on Thursday that its monthly manufacturing index fell unexpectedly for a second straight month to negative 16.4 – the bottom since April 2023 – from negative 5.5 in November. The median forecast amongst economists polled by Reuters was for a reading of three.0. Negative readings indicate a contraction in activity.

The report’s latest orders index tumbled to negative 4.3, the bottom since May, from plus 8.9 in November.

Factory managers continued to be optimistic about prospects in six months’ time but their growth outlooks nonetheless softened from a three-year high in November.

The regional report from the Philly Fed suggests the factory sector, accounting for just over 10% of the economy, is continuous to struggle finding its footing within the wake of the Federal Reserve’s rate of interest hikes in 2022 and 2023. While the Fed has shifted to rate cuts within the last half of this 12 months, it is just not expected to ease that much farther from here and market-based measures of borrowing costs remain notably higher than they were in early 2022 and proceed to exert pressure on investment.

On Tuesday the Fed reported that manufacturing output in November rebounded lower than expected from a month earlier and production declined 1.0% year-on-year.

Also clouding the outlook is President-elect Donald Trump’s ambitions for hefty latest tariffs on goods imported from abroad, which could trigger counter levies to be imposed on American exports by U.S. trading partners.

(Reporting By Dan Burns; Editing by Chizu Nomiyama)