Core Summary

  • Data released by the Institute for Supply Management (ISM) on Tuesday showed that U.S. manufacturers cut output and employment in March amid weak demand, slower deliveries, and tariff-induced cost pressures.
  • The ISM manufacturing index fell 1.3 points to 49 last month, below market expectations and below the 50 threshold that separates expansion from contraction (a reading below 50 indicates contraction). "Companies are lowering production plans in the face of economic headwinds," said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, in a statement.
  • Fiore said: "Companies continue to lay off workers in response to demand uncertainty. Tariffs are causing prices to accelerate, leading to a backlog of new orders, delayed supplier deliveries, and increased manufacturing inventories."

In-Depth Analysis

Another similar report released on Tuesday also highlighted the inflationary pressures from import tariffs, just as the Trump administration was preparing to announce a new round of tariff measures on Wednesday.

"In March, tariffs were the most frequently cited reason for rising factory input costs, with an increase not seen since the pandemic supply shock in mid-2022," said Chris Williamson, chief business economist at S&P Global Market Intelligence, referring to the company's manufacturing PMI.

He said: "A major concern for manufacturers is that the high level of uncertainty triggered by government policy changes, especially those related to tariffs, is causing customers to cancel or delay spending. Supply chains are also under pressure not seen since October 2022, with delivery delays becoming more common."

Both surveys highlight a shift in manufacturers' expectations: from optimism in January to caution in March. Factory workers have clearly borne part of the impact of this shift in sentiment.

Fiore said: "Surveyed companies continue to lay off workers." He added that these companies "still view 'natural attrition' as a better approach than direct layoffs."

The ISM said surveyed companies reported a decline in new orders (including new export orders), an accelerated reduction in order backlogs, and customer inventories remaining at "too low" levels.

Citing an unnamed respondent, the ISM said: "Newly implemented tariffs are significantly impacting gross margins."

The respondent also said: "New Canadian tariffs on U.S. goods are significantly impacting orders from that country." He added that "quotes and sales from Europe are also declining due to the threat of retaliatory tariffs."

Richmond Federal Reserve Bank President Tom Barkin said on Tuesday that new tariffs could push up both unemployment and inflation.

He said companies whose profit margins decline due to tariffs may resort to layoffs to improve efficiency.

Barkin said: "If you're a company that can't raise prices, then your margins will decline. You'll start working on improving operational efficiency, and that means layoffs."

He also said at the Council on Foreign Relations in New York that, meanwhile, producers of goods and services, who had responded to the pandemic supply shock by raising prices, may now be inclined to raise prices again. However, they will face consumers who, after experiencing the inflation shock earlier this decade, are unwilling to pay higher prices.

Barkin said: "It's a bit like a cage fight: on one side are emboldened suppliers who firmly believe they must pass on these tariff costs; on the other side are frustrated consumers who firmly believe 'I'm not paying those high prices again.'"

"How it turns out will be very interesting to watch," Barkin said during a moderated discussion at the Council on Foreign Relations in New York. "Clearly, part of those costs will be passed through to prices, so this will create inflationary pressure."