US manufacturing rebounds, tariffs could derail tentative recovery
Lucia Mutikani
Updated 5 min read
By Lucia Mutikani
WASHINGTON (Reuters) -U.S. manufacturing grew for the first time in more than two years in January, but recovery was likely to be short-lived after President Donald Trump imposed tariffs on goods from Canada, Mexico and China at the weekend, which will potentially further raise raw material prices and snarl supply chains.
The survey from the Institute for Supply Management (ISM) on Monday, which was conducted before the escalation in trade tensions, showed raw material inventories at factories were already declining last month, sending prices rising for the fourth straight month.
Economists warned of supply chain disruptions, weak economic growth or even a recession as well as higher prices for American consumers from the tariffs, which the White House said were to hold the nation's three largest trade partners "accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country."
Trump on Saturday slapped 25% tariffs on Canadian and Mexican goods that are due to take effect on Tuesday. Canada was also hit with a 10% tariff on energy products. A 10% tariff was imposed on goods from China. Trump on Monday said he would pause tariffs on Mexican goods.
The automobile industry is likely to take the biggest hit from tariffs. Layoffs or furloughs of workers were expected.
Economists said even if tariffs were delayed, the hanging threat would still be a constraint for manufacturing through a strong dollar that makes U.S.-made goods uncompetitive on the global market.
"Tariffs represent a negative supply shock, which hurts production and raises prices, a much smaller scale of what we experienced in the pandemic," said Kathy Bostjancic, chief economist at Nationwide.
"Another round of tariffs from the U.S. would amplify the deleterious impact on inflation and GDP growth."
The ISM said its manufacturing PMI increased to 50.9 last month, the highest reading since September 2022, from 49.2 in December. It was the first time since October 2022 that the PMI rose above the 50 mark, indicating growth in the manufacturing sector, which accounts for 10.3% of the economy. Economists polled by Reuters had forecast the PMI rising to 49.8.
Manufacturing has been undercut by the Federal Reserve hiking interest rates by 5.25 percentage points in 2022 and 2023 to tame inflation. The U.S. central bank started its policy easing cycle in September. It lowered rates by 100 basis points before pausing in January amid uncertainty about the economic impact of the administration's policies, including deportations.
"We are forecasting a recession in this quarter, it begins today, and ... almost no growth at all in the second half of the year," said Carl Weinberg, chief economist at High Frequency Economics. "We anticipate higher prices for many goods, meaning the Fed will not be able to cut rates to soften the fall."
U.S. stocks tumbled at the open, before recouping some losses. The dollar fell against a basket of currencies, but remains supported by tariff moves. U.S. Treasury yields dropped as investors sought a safe haven.
SNARLED SUPPLY CHAINS
Manufacturing output fell 0.4% from the fourth quarter of 2023 through the fourth quarter of 2024, Fed data showed.
"If tariffs do last for more than a few weeks, production slowdowns from supply chain disruptions and possible furloughs of employees could be apparent in sectors like auto manufacturing," said Veronica Clark, an economist at Citigroup. "The lingering threat of tariffs implying a much stronger U.S. dollar would also weigh on manufacturing as roughly half of manufactured goods are exported."
Eight industries reported growth last month, including textile mills, primary metals, machinery and transportation equipment. Among the other eight reporting a contraction were miscellaneous manufacturing, wood and computer and electronic products.
Makers of transportation equipment said "alleviating supply chain conditions are noticeably pivoting back into acute shortage situations," adding "concerns are growing of an environment of more supply chain shortages."
Their counterparts in the computer and electronic products industry said "as the U.S. administration transfers, we will continue to monitor impact of tariffs on materials used for manufacturing." Producers of electrical equipment, appliances and components said "business is slowly improving."
The ISM survey's forward-looking new orders sub-index jumped to 55.1 last month from 52.1 in December. Production at factories also picked up.
Its measure of prices paid by manufacturers raced to an eight-month high of 54.9 from 52.5 in December, where economists had forecast a rise to 53.5.
Suppliers' delivery performance was marginally slower. The survey's supplier deliveries index rose to 50.9 from 50.1 in December. A reading above 50 indicates slower deliveries.
Timothy Fiore, chair of the ISM's Manufacturing Business Survey Committee, noted that "panelists' companies likely did not receive as much material as desired."
Inventories contracted. Imports grew, suggesting manufacturers had been front-loading materials ahead of tariffs.
Factory employment expanded for the first time since May. It, however, has not correlated well with the manufacturing payrolls in the government's closely watched employment report.
Higher tariffs were also seen dragging the construction sector by raising the costs of lumber, the biggest input in homebuilding, and other components. Construction spending increased 0.5% in December, underpinned by single-family homebuilding, a separate report from the Commerce Department's Census Bureau showed.
"Even if they (tariffs) are watered down this year and eventually lifted, new protectionist measures will cut growth in residential investment and business investment in structures," said Bernard Yaros, lead U.S. economist at Oxford Economics.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
