Coming off of two consecutive months of growth, manufacturing activity in March did not keep the momentum going, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).
The report’s benchmark reading, the PMI, came in at 49 (a reading of 50 or higher indicates growth), down 1.3% from February’s 50.3 reading. January’s PMI, at 50.9, represented the first growth month, after a 26-month run of contraction.
The March PMI reading topped the 12-month average, of 48.5 by 0.5%. January’s 50.9 and October’s 46.9 mark the respective high and low readings for that period.
ISM reported that nine manufacturing sectors saw growth in March, including: Textile Mills; Petroleum & Coal Products; Fabricated Metal Products; Primary Metals; Computer & Electronic Products; Nonmetallic Mineral Products; Transportation Equipment; Electrical Equipment, Appliances & Components; and Miscellaneous Manufacturing. Sectors seeing contraction include: Wood Products; Paper Products; Plastics & Rubber Products; Furniture & Related Products; Chemical Products; Food, Beverage & Tobacco Products; and Machinery.
The report’s key metrics were largely down in March:
- New Orders, considered the engine driving manufacturing, fell 3.4%, to 45.2, contracting, at a faster rate, for the second consecutive month, coming off of a 6.5% February decline, which marked the steepest single-month decline going back to April 2020’s 15.1% decline. The category had not seen consistent growth since a 24-month stretch of expansion ended in May 2022 (ISM reported that six sectors saw growth in New Orders in February);
- Production, at 48.3, decreased 2.4%, following two months of growth, which was preceded by eight consecutive months of contraction to end 2024, with five sectors reporting growth;
- Employment, at 44.7, contracted, at a faster rate, for the second consecutive month (and 28th time in the last 35 months), which was preceded by seven months of contraction, with one sector reporting growth;
- Supplier Deliveries, at 53.5 (a reading above 50 indicates slower deliveries), were off 1.0% from February, slowing, at a slower rate, for the fourth consecutive month, with 11 sectors reporting slower supplier deliveries;
- Backlog of Orders, at 44.5, were off 2.3%, contracting, at a faster rate, for the 30th consecutive month, after 27 months of growth, with two sectors reporting growth;
- Prices, at 69.4, increased 7.0%, increasing, at a faster rate, for the sixth consecutive month, with 15 sectors reporting higher prices;
- Inventories, at 53.4, were up 3.5%, growing, after contracting in February, for a cumulative 7.0% gain over the last two months (February was up 4.0% while contracting), hitting its highest reading since October 2022, which also came in at 53.4, with 12 sectors reporting growth; and
- Customers’ Inventories, at 46.8, up 1.5%, while growing “too low,” at a slower rate, for the sixth consecutive month, with seven sectors reporting customers’ inventories as too high in March
Tariffs and the economy were the main themes cited in ISM panel respondents’ comments.
A Computer & Electronic Products panelist observed that customers are pulling orders due to anxiety about continued tariffs and pricing pressures. And a Machinery respondent noted that business condition is deteriorating at a fast pace, with tariffs and economic uncertainty making the current business environment challenging.
In an interview with LM, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, explained that the main takeaways of the report are declining revenues, coupled with declining production output, and the continuation of companies de-staffing people, due to the ongoing uncertainty related to what he described as the very confusing and complicated tariff rules set to be announced tomorrow.
“We are hours away from a major ‘tax’ being applied to all inbound products into the U.S., and we still don’t know what the details are,” he said. “We don’t know if they’re stacking them. We don’t know if they’re going to waive certain things. USMCA might get tossed in the trash at the 25% tariff on both partners. There’s just so much uncertainty here, and it’s freezing [things].”
Fiore observed that things are also frozen due to the demand side being weak, noting that out of ISM’s four demand elements, the only positive one in March was Customers’ Inventories, which he said was good but not great, with the caveat it is also probably the weakest of the four demand elements, with the others being New Orders, New Export Orders, and Backlog of Orders. And he added that the non-seasonal March PMI reading would have been around 50.3, with some seasonal effects that were not overcome.
“March is usually a very strong manufacturing month in terms of New Orders and Production, so our seasonal factors are normally higher than as a deduction, and we didn’t overcome them,” he said. “The other thing I’ll mention here is that if you take out the artificially high Inventory number, leave the Supplier Deliveries number as is, and manufacturing Inventories at 53.4, that’s very high. That’s just going to pull forward. So, put it back to 49 or 50 and its then at 48.3. That’s probably a more accurate reflection of where we really are right now. That number is not a bad number, but obviously it doesn’t support a growth environment, and it’s very similar to where we were last month with the same kind of adjustments on supplier deliveries and inventories.”
When normalizing for the unusual activity, he explained that is what the strategy and deployment of tariffs has brought to U.S. manufacturing, with a major caveat being that the worse may be yet to come.
On the more positive side, though, he observed that all manufacturing stakeholders are in the same situation, with some having a more of a challenge than others.
“If this is the way it is if you’re going to sell in the United States, and this is what you’re dealing with, then let’s get on with it,” he said. “We’ve had five measurement periods since the Trump administration got elected, and we’re pretty much where we were five months ago. We made good progress in November and December. Things looked good, and confidence was good. January was OK. And then the tariff issue became a bluff and then it became real. It’s very clear now that it’s no longer a bluff and is real. So, the question now is, how long will it stay in place? And with [White House Trade Advisor] Peter Navarro mentioning $600 billion in tariff revenue annually, that kind of tells you that this is going to go into place. It’s going to be in place for the balance of the year, and it’s going to be very large.”
That presents what Fiore called a huge transformation, with real potential for a declining economic environment over the next three years. And if this effort is successful and a major amount of manufacturing is eventually brought back to the U.S., Fiore said things will not go back to 2024 price levels.
“It will be 25% higher, because if you can manufacture in the U.S. and your competitor now has a 25% price advantage, you are going to raise your prices,” he said. “That is just the way it works. You are not going to sit there with a 25% price advantage against your competitors. You are going to grow your price 15% and maybe have a 10% price advantage. When everything is settled, we are going to have a higher cost of living that nobody is talking about—because the reason all of this stuff went overseas was to save money and reduce the costs for American consumers. That is exactly why we did it 30 years ago.”
Addressing manufacturing employment, Fiore explained that de-staffing is well underway, due to the sentiment that manufacturing is headed for a reduced output year, with ISM panelists’ comments in the report showing concerns about liquidity rather than profitability.
And that is leading to a situation in which manufacturing is structuring itself to be both leaner and more flexible, up against an unknown outcome at this time.
“We will see what happens and will deal with it, I guess,” he said. “It is going to be a very chaotic year, with 2025 likely to be known as the tariff year, and as for whether the tariffs stay in place throughout the year or not, we will have to see. The only way for this thing to work is to convince everybody that we’re putting these tariffs in place and they are staying because then you have clarity—and then American business can decide what they’re going to do. Are they going to pay a tariff because they’re inbounding stuff from Vietnam? Or are they going to build factories in the U.S. and try to avoid that and become uncompetitive worldwide? You almost have two different economies setting up here now, the protected economy of the U.S. and the rest of the world.”
