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Key Takeaways
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The Institute of Supply Management manufacturing index increased to 50.9% in January, the first indication of expansion in more than two years.
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New orders, increased production, and higher employment levels all pushed the manufacturing survey higher while industry officials were optimistic about the economic climate.
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However, the data doesn’t account for President Donald Trump’s moves to raise tariffs, which economists said could undercut the progress the manufacturing industry has made.
The manufacturing sector had its best month in more than two years in January. However, the improvement was not enough to soothe economists' worries about the effects of President Donald Trump’s trade policies on the manufacturing industry.
The Institute of Supply Management manufacturing sector Purchasing Managers’ Index for January moved above the 50% line for the first time in 26 months, indicating economic expansion in the sector. The 50.9% reading comes in higher than last month’s 49.2% result and is slightly more than predictions from economists surveyed by The Wall Street Journal and Dow Jones Newswires.
But the results don’t factor in Trump’s move to levy tariffs on Canada and China beginning Tuesday and tariffs on Mexico next month. The three countries represent about 40% of U.S. imports.
“The manufacturing sector continued its positive momentum in January, but we expect this will be short-lived due to the trade war initiated by President Trump over the weekend,” said Matthew Martin, senior U.S. economist at Oxford Economics. “Our initial modeling suggests markedly lower demand for goods, higher inflation, and higher interest rates—all of which will weigh on the nascent upturn in manufacturing.”
Optimism in Manufacturing Sector Could Be Shaken By Tariffs
The report showed that new orders increased for the third month, while current production expanded for the first time in nine months. Employment levels also moved higher.
Trump has promoted tariffs as a means to restore a U.S. manufacturing sector that has been languishing under the weight of elevated interest rates and tighter lending standards. By raising import taxes on foreign-made goods, Trump argues that more manufacturers will produce goods in the U.S. to avoid the higher costs.
The survey was taken before Trump announced the tariffs. At the time, manufacturing officials said they felt better about the economic environment in January though did mention concerns about tariffs.
“The select industry comments strike a tone of optimism among purchasing managers with some mention of tariff and supply chain concern,” the Wells Fargo note said.
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