President Trump’s escalation of trade tensions and a dimming outlook for the global economy are taking their toll on the U.S. Manufacturing sector.
The Institute for Supply Management’s monthly manufacturing index fell to its lowest level last month since October 2016, the ISM said Monday. The group’s purchasing managers index (PMI)—considered a key metric of U.S. Manufacturing activity and confidence within the sector—slipped to 52.1% in May from 52.8% in April, missing estimates and continuing a period of softening that dates back to August 2018.
The PMI did remain above the all-important 50% mark, which indicates continued economic expansion within the domestic manufacturing sector. Still, executives from industries including electronics and chemicals noted the pressure that the Trump administration’s import tariffs have placed on their operations—with some forced to realign their supply chains to account for the increased cost of Chinese goods.
While pointing out that “overall sentiment remained predominantly positive,” Timothy Fiore, chair of the ISM’s Manufacturing Business Survey Committee, said respondents “expressed concern with the escalation in the U.S.-China trade standoff,” adding that the PMI “continues to reflect slowing expansion.”
In addition to heightened trade tensions, analysts say the dip in manufacturer confidence also reflects an overall weakening in global demand, as well as the waning impact of fiscal stimulus measures—namely, the Trump administration’s tax reform law—that spurred U.S. Economic growth though much of 2018.
“There are many macro factors to consider, but [slowing] global demand is certainly one of them,” according to Barclays senior U.S. Economist Jonathan Millar, who cites weaker demand out of China and Europe as “the two main areas of concern globally.”
Millar also notes that a stronger dollar has come to put U.S. Manufacturers “on a weaker footing compared to global manufacturers,” and adds the effects of the Trump administration’s fiscal stimulus “are wearing off now” for American companies—with manufacturers proving no exception. “This is a cyclical sector, and it’s going to reflect cyclical forces,” he says.
U.S. Manufacturing did experience somewhat of a resurgence in the wake of President Trump’s election in November 2016, with sentiment improving on the back of Trump’s protectionist stance and business-friendly fiscal policy. After the PMI fell into contraction territory (49.4%) in August 2016, it steadily ticked upward through 2017 and remained strong through the first half of 2018, before eventually peaking at 60.8% last August.
Yet sentiment has turned since then amid souring trade relations with China and a global economic picture that has lagged behind a relatively robust U.S. Economy. And now there’s the likelihood of President Trump potentially opening a second trade war front, via last week’s threat of new tariffs on Mexico.
“If they were to implement those tariffs, it would affect Mexican manufacturers—many of which are integrated with U.S. Manufacturers,” Millar says, citing the automotive industry as one example. “It would be disruptive to those supply chains.”
For American manufacturers hoping for a resolution on the issue of trade, that could mean that things only get worse before they get any better.
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