Manufacturing grew at a slower rate in February, a sign the Trump administration’s trade policies could cause a weakening economy in the coming months.
The Institute for Supply Management said Friday that the index it uses to measure the manufacturing sector was at 50.3, down from 50.9 in January and lower than economists’ average forecast. Any number above 50 in the index indicates expansion.
The slower rate of expansion in February is a sign that the manufacturing sector, which expanded in January after 26 months of consecutive contraction, could be losing momentum. Meanwhile, prices in manufacturing jumped by 7.5, to 62.4 from 54.9 in January, and new orders dropped by 6.5, from 55.1 to 48.6.
“If you were looking for something that’s kind of a dismal report, this might have had it all,” said Hugh Johnson, Chairman of Hugh Johnson Advisors, of the ISM numbers.
The report suggests that manufacturing managers are holding off on hiring, investing and expanding operations as they wait to see what effect the Trump administration’s coming tariffs on Mexico, Canada and China are going to have. But the report also shows the tariffs are already causing inflationary pressure, and that a slowdown in the economy is likely in the first quarter of 2025.
The report’s measures of employment also contracted in February, while production is hovering just above the contraction line. This all points to hesitancy and even pullback among purchasing managers in the face of uncertainty around trade policy.
President Trump has imposed tariffs on steel and aluminum as well as tariffs on Canada, Mexico and China. Most economists say that while tariffs might boost specific sectors of domestic manufacturing, they can also harm other sectors that use imported inputs and will most likely cause a slowdown in the overall economy.
Because an enormous amount of raw material for manufacturing is imported from China, the increased 10% tariffs to be imposed on that nation Tuesday are inevitably going to raise prices, economists say. But it’s not yet clear how much of the higher prices will be passed on to consumers.
That very uncertainty is a challenge for companies because some manufacturing suppliers are refusing to deliver products until it’s decided who will pay for the higher costs incurred by tariffs, said Timothy Fiore, the chair of ISM’s manufacturing business survey committee. And according to Hugh Johnson, of Hugh Johnson Advisors, increased prices could soften consumer demand and, in turn, reverse the already shaky expansion in manufacturing.
“I think when you put it all together,” said Marc Giannoni, Chief US Economist for Research at Barclays, “the picture for the first quarter certainly looks to be considerably weaker than we had seen in the fourth quarter of last year.”
