Manufacturing contracted in March after modest expansion in February, a sign the economy could be heading into a recession or a period of stagflation in response to the Trump administration’s tariffs.
The Institute for Supply Management said Tuesday that the index it uses to measure the manufacturing sector fell to 49, down from 50.3 last month and quite consistent with economists’ forecasts. Any number above 50 in the index indicates expansion.
The contraction in March is a sign the manufacturing sector, which started losing momentum in February, continued a downward trend. Meanwhile, prices in manufacturing rose for the second month in a row, jumping by 7 from 62.4 to 69.4; new orders dropped again, by 3.4, from 48.6 to 45.2.
The report suggests the economy is entering a new period of turbulence. The manufacturing sector is contracting because business owners are hesitant to invest in new projects or workers during a period of deep uncertainty caused by the tariffs. In fact, employment in the sector fell during March. At the same time, the tariffs, and the anticipation of future inflation they might cause, are already causing prices to increase.
“To see prices paid increase is, first of all, disappointing. Secondly, very expected. Thirdly, very consistent with what is transpiring with regard to tariffs,” said Hugh Johnson, Chairman of Hugh Johnson Advisors.
Johnson also said that investors and business people are worried about not just a recession but also the possibility of stagflation, a situation where the economy is contracting but at the same time inflation is increasing.
The economic activity reflected in today’s report is consistent with what happened during the Trump administration’s last trade war, in 2018-19, when tariffs caused the rate of inflation to increase.
“Business condition is deteriorating at a fast pace,” one respondent said in the ISM report. The deterioration is caused by economic uncertainty due to the tariffs. The report also suggests that managers are raising prices and slowing orders in anticipation of the effect the Trump administration’s tariffs are going to have on the economy. It also suggests those effects are now beginning to show up in the actual behavior by business owners.
Another sign of trouble is that employment also fell for the second month in a row, while production, which was hovering just above the contraction line last month, also declined. This all points to widespread concern among investors and business owners about how the tariffs, some of which have gone into effect and others of which will soon go into effect, are going to shape the economy in the coming months.
The news concurs with the experience of Jeremy Lipinski, a managing partner at Emergent Solar Energy, a company that designs and sells solar energy projects to other companies in the manufacturing and agricultural sectors in Indiana and contiguous states. Lipinski hasn’t yet seen a slowdown in business, but he’s concerned about how the tariffs might affect his company’s sales in the future.
“Our main concern relates to how our potential clients are somewhat reluctant to make a big capex investment during this time of uncertainty,” Lipinski said. (Capex refers to a capital expenditure, an upgrade in assets).
If Lipinski’s clients don’t invest in new projects, he won’t have new business and that could eventually lead to layoffs. But Lipinski was also upbeat about the prospect of manufacturing returning to the US and added that there’s a positive sentiment in the Midwest that short-term pain caused by the tariffs could have positive results in the long-term.
But Marc Giannoni, chief US economist at Barclays, does not see any reason for optimism. Instead he points to a “weakening across all the components” in today’s report, which indicated that manufacturers increased their inventories in March. While that’s normally a sign of economic confidence, in this case Giannoni said the increase is not a sign of optimism but “precautionary stock building,” buying on the part of businesses to get ahead of anticipated price increases caused by the tariffs. Gannoni’s analysis corresponds to what another respondent said in the report: “Customers are pulling in orders due to anxiety about continued tariffs and pricing pressures.”
In the near-term future Giannoni forecasts a sluggish economy. He thinks it will be difficult for companies to start production or restructure their supply chains and that they may pause on making new hires for “some time.”
“We are pretty pessimistic about the path of the economy going forward in the near term,” Giannoni said.
