MNI INTERVIEW: Tariff Uncertainty To Drive Factory Outlook-ISM

Uncertainty over trade policy will drag on U.S. manufacturing until at least the fourth quarter, as demand remains weak and the preemptive build-up of inventories begins to deplete, Institute of Supply Management survey chief Susan Spence told MNI on Monday. 

The ISM manufacturing PMI fell two-tenths to 48.5 in May, below expectations for a slight rebound to 49.2, in a third straight month of contraction after a brief two-month expansion earlier in the year. The vast majority of respondents expressed concern over tariffs even as duties on imports fell last month, Spence said. 

"The word whiplash showed up quite a bit," Spence said. "It’s remarkable when you see 86% of purchasing managers of all industries saying this is untenable, we’re not sure what to do, we can’t hire, production is down, new export order and imports take a plunge. It’s absolutely the uncertainty."

By her count, there have been over 30 material trade policy shifts since the start of the year, not counting the court decisions last week that called into question the legal foundation of most of the new tariffs.  

"Even before the court cases, our feeling was it’s September before anything really settles out. And that's if the 90-day pause stuck with a deal that stuck after that," Spence said. "And by the time that rolls around, it will have been eight months since the tariffs started in earnest."

With the manufacturing sector typically leading the broader economy by six months, "I’m very worried about starting to see these trends in other areas." 

CONTINUE TO STRUGGLE

The production Index increased to 45.4 from an alarmingly low reading of 44 in April, but factory output continued to contract in May. Three out of four demand indicators remained negative, including new orders at 47.6. Prices continued to increase but at a slightly lower rate, with the index hitting 69.4 in May. 

Purchasing managers are hoping customers need to reorder soon, as the customer inventories index fell into "too low" territory, Spence said.

Employment ticked up again, but at 46.8 indicated that head-count reductions continued for a fourth straight month. "For every hiring comment, there were 1.4 comments about workforce management. Layoffs continue to be the new tool there," Spence said. 

The inventories index also entered contraction territory after expanding as companies completed "pull-forward activity" ahead of tariffs, Spence said. 

"If there's not fresh orders coming in the door and inventories being bought, if imports are contracting, and the backlog is not making up for the front-end, my worry is that’s going to be really, really bad news for production," she said. Imports contracted drastically to 39.9, the lowest since May 2009, as subdued demand reduced the need to maintain import levels.

Remarkably, interest rates did not come up once in all of respondents' comments, an indication that capital expenditures have likely been sidelined regardless of expectations for falling borrowing costs, Spence said.

"The manufacturing economy continues to struggle, and it will continue to struggle until there’s more certainty around what happens to tariffs." (See MNI INTERVIEW: Fed Will Face ‘Tough Calls’ In H2-Holtz-Eakin)