Manufacturing activity and sentiment contracted again after two months of modest expansion mostly because of the impact of anticipated tariffs on orders and prices. The ISM manufacturing index fell to 49 from 50.3 in the prior month.
While the argument for tariffs is how they will benefit domestic producers, the disruption in global trade has proven to be challenging for American manufacturers. That dynamic clearly showed up in the survey as most respondents pointed to the negative impact of tariffs on their production.
“Newly implemented tariffs are significantly impacting gross profits. Canada’s new tariffs on U.S. goods are significantly impacting orders from that country. Quotes and sales are lower from Europe due to the threat of retaliatory tariffs,” said a manufacturing executive.
The increase in the prices paid component of the survey also suggested that prices have been increased even before tariffs are in effect. The prices paid subindex rose to 69.4 from 62.4, the highest since 2022.
Because firms and consumers are expecting prices to go up because of tariffs, it will be much easier for manufacturers to pass the price hike on to consumers.
Facing increasing uncertainty, manufacturers indicated a lot less desire to ramp up hirings with the employment component of the survey falling to a six-month low.
That was consistent with a slowdown in job openings in February, especially manufacturing jobs. Job openings fell to 7.568 million from 7.762 million as the job opening rate dropped to 4.5% from 4.7%.
While most of the job openings data pointed to continued normalization instead of material weakness, we expect more downside once the impact of tariffs and federal government layoffs begin to show up more.
Right now, federal job postings remained solid according to the data in February, which we don’t think accurately represented the underlying demand for government workers.
Even with a further labor market slowdown, we don’t expect the impact of that slowdown on wage inflation could offset the sharp increases in goods inflation coming from tariffs. Thus, such price increases should fuel more concerns about a “stagflation-lite” condition in the coming months.
Read more of RSM’s insights on the economy and the middle market.
