MNI INTERVIEW: Manufacturing Needs Fed Cut To Turn Around -ISM

U.S. manufacturing is likely to see a stagnant year unless there is more stability in trade policy and an interest rate cut from the Federal Reserve at its September meeting, Institute for Supply Management CEO Thomas Derry told MNI. 

If the Fed doesn't cut in September "it will just perpetuate these conditions that we're in right now," he said. "If the Fed defers one more time in September, it means manufacturing was a wash for the year. We've been in contraction for five months now. I don't see any reason why we would expect conditions to improve if we don't get a Fed rate cut in September."

Uncertainty over trade policy will drag on U.S. manufacturing until at least the fourth quarter and whether or not demand returns will be heavily dependent on Federal Reserve monetary policy, Derry said. The employment subindex at 43.4 fell to the weakest since the spring of 2020. 

"It just basically guarantees we continue to move sideways in manufacturing in the United States" if the Fed doesn't ease, Derry said. (See: MNI INTERVIEW: Fed September Cut Not Assured - Rosengren) 

"I'm focused on how widespread the contraction in manufacturing is," he said. "Seventy-six percent of manufacturing GDP was in contraction in July. None of the big six industry sectors was in expansion last month. Thirty-one percent of manufacturing GDP was in strong contraction. Both of those numbers are the highest we've seen since December of 2024."

The ISM manufacturing PMI fell one percentage point to 48.0 in July, below expectations for a slight rebound to 49.5. Manufacturing has been in contraction for five straight months. It saw expansion at the start of the year but was in contraction for 26 months before that. 

PASS THROUGH

The vast majority of respondents said they are now considering passing on duties on imports to customers, Derry said. "A significant number of comments in this month's report said they're now considering passing on price increases to our customers."

"Price pressures are building in the supply chain itself," he said. "Those numbers are up for intermediate goods. That's why the Fed's in a tough place." Still, Derry is confident tariff-related price price increases will be one-time jumps. The ISM prices subindex eased nearly 5 percentage points in July to 64.8. 

TRADE CLARITY

New orders are likely to increase in coming months due to dwindled inventories but what's even more important is the Fed and whether the Trump administration is closer to providing a more stable environment for tariff policy. 

"Companies have been very cautious, because the environment has been so unpredictable, and if the trade deals are interpreted as being okay, we're beginning to understand what the rules of the road are going to be going forward. Then they'll think that creates conditions where companies will feel comfortable investing," he said. "But the Trump administration is now using tariffs for non-trade and non-economic reasons, like political reasons, like Brazil. And that's an overhang."

"There's a view that customer inventories are too low and we've worked through the big stock-up purchases that happened earlier in the year."

The backlog subindex is the most important predictor of manufacturing right now, he said. "If inventory builds happen then that could push us closer to the 50 number" in the headline PMI, he said, expressing little confidence that happens this year.