U.S. manufacturing growth hits three-year low as tariffs continue impact

The significant slowdown trend over the past few months has most manufacturing sectors pointing directly to tariffs.

The ever-changing trade war between the U.S. and China may be over (for now), but not before volatile tariff tensions overwhelmed American manufacturing growth throughout the last few months.

The Institute for Supply Management (ISM) released its June Report on Business this week, registering its lowest PMI (Purchasing Managers’ Index), 51.7 percent, since October 2016 and a 4.3 percent drop below a 12-month average. June's growth slowdown comes on the heels of PMI dropoffs in April (2.5 percent decline) and May (0.7 percent decline).

June's 51.7 reading was, however, still slightly better than Dow Jones' expected 51.3. The report also showed that industry hiring increased to 54.5 from 53.7 the previous month.

As always, any PMI reading 50 percent or higher indicates industry expansion. But the significant slowdown trend over the past few months has most manufacturing sectors pointing directly to tariffs.

“Respondents expressed concern about U.S.-China trade turbulence, potential Mexico trade actions, and the global economy,” ISM Manufacturing Business Survey Committee Chair Timothy Fiore said. “Comments from the panel reflect continued expanding business strength, but at soft levels. Demand expansion ended, with the new orders index recording zero expansion, the customers’ inventories index remaining at a too-low level, and the backlog of orders index contracting for the second straight month. New export orders remain weak."

The inventories data especially stands out. The Inventories Index registered 49.1 percent, a decrease of 1.8 percentage points from May and the first contraction since December 2017. The "too-low" customers' inventories increased less than percent to 44.6 percent. But this will keep supply chains flowing as new order will quickly translate into new shipment demand, says Keith Prather, co-managing director at Armada Corporate Intelligence.

"Manufacturers and their customers are showing inventory sensitivity," Prather adds. "Concerns over longer-term economic weakness has companies trimming inventories. Positively, any new order demand immediately creates demand up and down the manufacturer’s supply chain (from raw materials to finished goods). There are no overstocks in the system, inventories are lean and relatively operating in a just-in-time replenishment cycle."

Overall, sentiment from the ISM panel was evenly mixed in June, added Fiore.

While 12 of the 18 manufacturing sectors indicated at least some amount of growth on the June ISM report, including machinery and appliances/components, the metal fabrication sector was one of five signaling contraction.

Metal fabricators reported declines across several key manufacturing categories, including overall production, new orders, employment, and export orders.

“Tariffs continue to adversely impact decisions and forecasting," an anonymous representative from the fabricated metal products segment noted in the ISM report. "Our increasing fear is that current trends will weaken the global economy, influencing our ability to grow in 2020 and beyond.”

But now that President Donald Trump and Chinese President Xi Jinping have agreed to resume trade talks, the obvious concern is what it all means for manufacturing sectors and supply chains that took the brunt of the tariffs.

Does that mean the second half of 2019 is poised to get back to the steady uptick of manufacturing growth we've all been accustomed to the few years before Trump's tariffs took hold?

Maybe, but maybe not says Chris Kuehl, co-managing director of Armada Corporate Intelligence and economic analyst for the Fabricators & Manufacturers Association Intl.

"The markets reacted positively to the deal but that rally will likely be short-lived as there remain a lot of unanswered questions," Kuehl writes. "The resumption of talks does not mean that new concessions have been offered by either side and all of the same logjams are in place. It remains likely that future talks will stall and it will then come down to whether Trump or Xi wants to escalate the tension again."