Tariffs squeeze US manufacturing in April, lift input prices

U.S. manufacturing contracted for a second straight month in April as tariffs on imported goods strained supply chains, keeping prices at the factory gate elevated and encouraging some firms to lay off workers.

The Institute for Supply Management (ISM) survey on Thursday showed President Donald Trump's protectionist trade policy was hurting manufacturers. Tariffs were cited as problematic by respondents in every industry, with some taking issue with the disorderly manner in which the import duties were being imposed.

Trump's "Liberation Day" tariff announcement on April 2 ushered in sweeping duties on most imports from U.S. trade partners, including a hike in duties on Chinese goods to 145%, sparking a trade war with Beijing. But Trump also suspended reciprocal tariffs against trade partners for 90 days.

"We expect the contraction for the manufacturing sector to deepen through the summer even if tariffs, especially those on imports from China, are eased soon," said Ben Ayers, senior economist at Nationwide.

The ISM's manufacturing PMI dropped to a five-month low of 48.7 last month from 49.0 in March. A PMI reading below 50 indicates contraction in the manufacturing sector, which accounts for 10.2% of the economy. Economists polled by Reuters had forecast the PMI would decline to 48.

A flood of imports as businesses sought to get ahead of tariffs weighed on gross domestic product in the first quarter.

The PMI could have dropped more last month were it not for longer delivery times and higher inventory as factories sought to bring in more inputs to beat tariffs.

A lengthening in suppliers' delivery times is normally associated with a strong economy, which would be a positive contribution to the PMI. But that is not the case this time.

"However, I would argue that the health of the factory sector is worse than the headline index would suggest," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "The chaos around tariffs is causing a steep fall in activity, but at the same time producing longer delivery times and inventory accumulation."

Manufacturing is heavily reliant on imported raw materials. The second straight monthly decline in the PMI ended a brief recovery in manufacturing that had been driven by hopes for a less stringent regulatory environment under the Trump administration and Federal Reserve interest rate cuts.

Eleven industries including electrical equipment, appliances and components, computer and electronic products and machinery reported growth. Among the six reporting a contraction were wood, paper products and transportation equipment.

U.S. stocks were trading higher. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.

Transportation equipment manufacturers said tariffs were impacting operations, specifically noting that "delayed border crossings and duties calculations that are complex and not completely understood."

Makers of computer and electronic products reported that "all inbound Chinese shipments are on hold," adding "it is not feasible for our business or customers to sustain the pricing required to provide an acceptable margin."

TARIFF WHIPLASH

Machinery manufacturers said "tariff whiplash is causing us major issues with customers." Some domestic producers were taking advantage of tariffs to raise prices. Makers of fabricated metal products noted that "domestic producers are charging more for everything because they can."

Manufacturers of nonmetallic mineral products reported that "strategic procurement and the supply chain are paralyzed in a world that changes daily due to tariffs."

The ISM survey's forward-looking new orders sub-index improved to 47.2, as businesses tried to beat the duties, from 45.2 in March. Production at factories remained depressed amid the worsening in suppliers' delivery performance.

The survey's supplier deliveries index increased to 55.2 from 53.5 in March. A reading above 50 indicates slower deliveries. Inventories at factories continued to rise, though at a moderate pace.

"Inventory growth is not a positive sign when demand is moving in the opposite direction; the recent expansion is considered a temporary move to avoid tariffs, and levels will decline when such trade issues are resolved," said Timothy Fiore, who chairs the ISM's Manufacturing Business Survey Committee.

"Supplier delivery performance reflects this pull-forward activity and delays in clearing goods through ports of entry."

The survey's measure of prices paid by manufacturers for inputs edged up to 69.8, the highest level since June 2022, from 69.4 in March. Factories continued to shed jobs, with Fiore noting that "companies generally opted for layoffs because they are quicker to implement than attrition."

But businesses in general have mostly adopted a wait-and-see attitude to the tariffs and are retaining their workforces, while remaining cautious about adding headcount.

A separate report from the Labor Department showed initial claims for state unemployment benefits jumped 18,000 to a seasonally adjusted 241,000 for the week ended April 26.

Claims were boosted by school spring breaks in New York state. Economists expect the tariffs to result in a wave of job losses. Expected to be a drag on domestic demand, the duties already are prompting some companies to reduce staff.

United Parcel Service UPS said this week it would slash 20,000 jobs and shut 73 facilities as part of a planned reduction in deliveries for Amazon.com.