- Manufacturing is slowing just as tariff increases are set to take hold.
- Continued weakness in manufacturing would exacerbate already slowing global and U.S. economic growth.
- Middle market businesses face additional potential supply chain disruptions if Mexico tariff threat takes hold.
The Institute for Supply Management’s Purchasing Managers Index declined to 52.1 from 52.8 in May, its lowest reading since October 2016 when the index registered 51.7. While holding above the 50 mark, which is the demarcation between expansion and contraction, comments from the panel reflect continued expanding business strength but at a slower pace.
Meanwhile, an index of prices paid rebounded to 53.2, a sign that inflation could be beginning to pick up. A gauge of supplier deliveries dropped to 52. Readings below 50 indicate faster deliveries, while those above 50 signal slowing.
ISM’s production gauge dropped to 51.3 in May, the lowest level since August 2016, even as the gauge of backlogs declined to a two-year low. At the same time, the measure for new orders increased, as did the employment gauge, a sign of possible stronger hiring in manufacturing ahead of this week’s May employment report.
What’s to come?
Producers, who already faced headwinds from slowing global growth and inflated inventories built in advance of proposed tariff increases, may face additional disruptions after the current administrations threat last week to impose tariffs of 5 percent on all imports from Mexico. Continued weakness in the manufacturing space would contribute to slowing global and U.S. economic growth and could be a factor that prompts the Federal Reserve to reevaluate their position on interest rates, leading to a cut interest rates, as investors and some economists expect.