The manufacturing sector contracted in March after modest expansion in February because owners were hesitant to invest in assets and were willing to let workers go during a period of economic uncertainty induced by the Trump administration’s constantly shifting tariffs.
On Thursday the Institute for Supply Management’s Purchasing Managers’ Index (PMI) will release its next report for April, which is expected to show manufacturing continuing to struggle in a volatile economic environment.
The PMI, a monthly survey of manufacturers, fell in March to 49, down from 50.3 in February and 50.9 in January. Any number below 50 in the index signals contraction, so last month reversed a two month period of expansion, which followed 26 months of continuous contraction in the sector.
Here are five things to watch for in tomorrow’s report:
Manufacturing likely to continue downward trend
A group of 85 economists surveyed by Bloomberg are forecasting an average of 47.96 for tomorrow’s ISM headline number, a worrying continuation of the downward trend from last month. The continuing slide into contraction was confirmed this morning by the Chicago PMI, a survey of manufacturing in the Chicago area that slid to 44.6, a decrease from last month’s number of 47.6. The average forecast suggests a steady rather than sudden erosion of the manufacturing sector, but we are likely to see worse numbers in the second quarter of 2025.
Prices in the report will be key to understanding inflation
Economists will be closely watching what happened to manufacturing prices in April. In March prices jumped from 62.4 to 69.4 from February, a worrying sign of possible inflation or even stagflation, where prices go up even as the economy slows. According to Hugh Johnson, chairman of Hugh Johnson Advisors, prices will be the most important part of tomorrow’s report, and an additional increase there “would be consistent with the consensus forecast for inflation as we move through 2025,” he said.
Inventories also important
Last month inventories also increased, most likely because businesses were trying to get ahead of anticipated price increases caused by the Trump administration’s tariffs. According to some economists, last month’s inventories number made the report seem more optimistic than it actually was. A contraction in inventories in April would demonstrate increased uncertainty among business owners as they wait to see how the tariffs affect the economy.
Production could go up
In March production dropped into contraction, from 50.7 to 48.3. But according to Oscar Munoz, chief US macro strategist at TD Securities, production might rise in tomorrow’s report, a possible sign that some companies, such as auto producers, are ramping up ahead of the impact of the tariffs. Such a scenario would offset a decline in other areas of the report, such as employment, which contracted from 47.6 to 44.7 last month. But an expansion in production will not be a sign of optimism but of concern.
ISM report of particular importance right now
The ISM report takes on greater significance at different times, and right now it is of crucial importance in terms of understanding the overall state of the economy in this period of volatility, according to Johnson. “Tariffs and economic uncertainty are making the current business environment challenging,” one respondent said in March’s ISM report. With tomorrow’s installment we’ll start to see with greater clarity how those problems are affecting the overall economy. If prices rose and the rest of the manufacturing sector declined in April that could be a sign of things to come.
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