US Manufacturing Rebounds, But Tariff Threat Looms

The US manufacturing sector saw its first expansion in over two years in January, as reported by Reuters. However, economists warn that the sector’s recovery is uncertain, given President Biden's imposition of tariffs on goods from Mexico and Canada last Saturday. The US President stated on Monday that he would pause the 25% tariffs on Mexican and Canadian goods, but the 10% levy on goods from China remains in place. Economists believe the persistent threat of tariffs will dampen manufacturing growth by strengthening the dollar and making US-made goods less competitive globally.

"Tariffs represent a negative supply shock, which hurts production and raises prices, a much smaller scale of what we experienced in the pandemic," said Kathy Bostjancic, chief economist at Nationwide, to Reuters. "Another round of tariffs from the U.S. would amplify the deleterious impact on inflation and GDP growth."

The Institute for Supply Management (ISM) released a survey on Monday, conducted before the tariff escalation, revealing that raw material inventories at factories were already shrinking last month, leading to the fourth consecutive monthly increase in raw material prices. The ISM's manufacturing purchasing managers' index (PMI) climbed to 50.9 in January, its highest reading since September 2022, and the first time it surpassed the 50-mark (indicating growth) since October 2022. Economists had anticipated a less robust rise to 49.8.

The Federal Reserve's aggressive interest rate hikes in 2022 and 2023 to combat inflation have weighed on the manufacturing sector. However, the central bank began easing its monetary policy in September, pausing its rate cuts in January amid uncertainty surrounding the economic impact of administration policies.

The lingering threat of tariffs and a stronger dollar is expected to further dampen manufacturing growth, as roughly half of manufactured goods are exported. Eight industries reported growth in January, including textile mills, primary metals, machinery, and transportation equipment. However, eight other industries reported contractions, including miscellaneous manufacturing, wood products, and computer and electronic products.

"The lingering threat of tariffs implying a much stronger U.S. dollar would also weigh on manufacturing as roughly half of manufactured goods are exported," said Veronica Clark, an economist at Citigroup, to Reuters.

The ISM survey's forward-looking new orders sub-index jumped to 55.1 in January, indicating optimism. Factory production also increased. However, the measure of prices paid by manufacturers surged to an eight-month high, suggesting inflationary pressures. Supplier delivery performance was marginally slower, signaling potential supply chain constraints.

Higher tariffs are also expected to negatively impact the construction sector by increasing the cost of lumber and other components. Construction spending increased by 0.5% in December, driven by single-family homebuilding, according to a separate report from the Commerce Department's Census Bureau.

"Even if they (tariffs) are watered down this year and eventually lifted, new protectionist measures will cut growth in residential investment and business investment in structures," stated Bernard Yaros, lead U.S. economist at Oxford Economics, to Reuters.