Tariff Gloom Weighs on US Manufacturing; Delivery Times Lengthening

U.S. manufacturing contracted for a third straight month in May and suppliers took the longest time in nearly three years to deliver inputs amid tariffs, potentially signaling looming shortages of some goods.

President Donald Trump’s aggressive trade policy again dominated commentary from manufacturers in the Institute for Supply Management (ISM) survey published on Monday, and suppliers were passing on the import duties to customers. That challenges the Trump administration’s narrative that China and other trade partners paid the tariffs.

The on-again and of-again tariffs were described by some transportation equipment manufacturers as having “wreaked havoc on suppliers’ ability to react and remain profitable,” while makers of computer and electronic products viewed the duties and government spending cuts as “raising hell with businesses.”

“The outlook for the manufacturing sector looks downbeat, particularly with the initial surge in demand from front-loading now behind us,” said Matthew Martin, senior economist at Oxford Economics. “Businesses are contending with higher input costs, supply disruptions, and domestic and foreign customers wary of committing to new orders.”

The ISM said its manufacturing PMI edged down to a six-month low of 48.5 last month from 48.7 in April. A PMI reading below 50 indicates contraction in the manufacturing sector, which accounts for 10.2% of the economy.

The PMI, however, remains above the 42.3 level that the ISM says over time indicates an expansion of the overall economy.

Economists polled by Reuters had forecast the PMI rising to 49.3. The survey suggested manufacturing, which is heavily reliant on imported raw materials, had not benefited from the de-escalation in trade tensions between the White House and China. Trump last week said he would double tariffs on steel and aluminum imports to 50%.

Seven manufacturing industries including furniture, electrical equipment, appliances and components as well as machinery reported growth. Among the seven reporting a contraction were transportation equipment, chemical products and primary metals.

Economists say the chaotic manner in which the import duties are being implemented is making it difficult for businesses to plan ahead, sentiments echoed by manufacturers. Another layer of uncertainty was added by a U.S. trade court last week blocking most of Trump’s tariffs from going into effect, ruling that the president overstepped his authority. But the tariffs were temporarily reinstated by a federal appeals court on Thursday.

Tariffs helped to weigh on spending on single-family homebuilding in April. A separate report from the Commerce Department’s Census Bureau showed construction spending dropped 0.4% after declining 0.8% in March, with outlays on new single-family housing projects declining 1.1%.

Stocks on Wall Street were trading lower. The dollar slipped against a basket of currencies. U.S. Treasury yields rose.

“FINANCIAL DISTRESS”

Some manufacturers of transportation equipment also noted that while “vehicle manufacturers have already rolled price increases into their products to protect their bottom lines,” they had “not been as cooperative with their supply bases.” They added “this has resulted in a high occurrence of suppliers falling into financial distress.”

Makers of electrical equipment, appliances and components said “the administration’s tariffs alone have created supply chain disruptions rivaling that of COVID-19.”

Manufacturers of paper products warned the “unresolved trade deal with China will result in empty shelves at retailers for many do-it-yourself and professional goods.”

Machinery manufacturers worried about China’s export restrictions on rare minerals. Makers of fabricated metal products said their “Asia customers are requesting delayed shipments” because of tariffs.

Suppliers are passing on the tariffs to customers. Chemical products manufacturers reported that “the position being communicated is that the supplier considers it a tax, and taxes always get passed through to the customer,” adding “very few are absorbing any portion of the tariffs.”

Trump sees the tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining industrial base, a feat that economists argued was impossible in the short term because of labor shortages and other structural issues.

The ISM survey’s supplier deliveries index increased to 56.1, the highest since 2022, from 55.2 in April. A reading above 50 indicates slower deliveries.

A lengthening in suppliers’ delivery times is normally associated with a strong economy. But in this case slower supplier deliveries likely indicated bottlenecks in supply chains related to tariffs. Port operators have reported a decline in cargo volumes.

The ISM’s imports measure dropped to 39.9, the lowest since early 2009, from 47.1 in April. Exports also were lower. Customer inventories hit a 15-month low. The survey’s measure of prices paid by manufacturers for inputs eased to a still-high 69.4 from 69.8 in April.

“Pressure on manufacturers to pass on their costs further up the supply chain will mount as inventories dwindle, as they eventually will have to restock at much higher prices,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

Production at factories remained subdued, while new orders barely saw an improvement. The ISM survey’s forward-looking new orders sub-index inched up to 47.6 from 47.2 in April.

Factories continued to shed jobs. The survey’s measure of manufacturing employment rose to 46.8 from 46.5 in April. The ISM Business Survey Committee Chair Susan Spence said comments from respondents reflected an acceleration of head-count reductions due to uncertain near- to mid-term demand.

“In the context of on-again, off-again tariff policy, most businesses are left sitting on their hands as they await any sign of more-persistent clarity,” said Shannon Grein, an economist at Wells Fargo.

Topics USA Manufacturing