(Updated with Trump tweet on June 7 in seventh paragraph.)
Manufacturing expansion slowed in May and faces a major “headwind” in the form of tariffs, the Institute for Supply Management said Jun 3.
The Tempe, Ariz.-based group’s manufacturing index, known as the PMI, slipped to 52.1 percent last month, down from 52.8 percent in April. It was the lowest PMI level since 51.7 percent in October 2016.
The results represent “near zero growth,” Timothy R. Fiore, chair of ISM’s Manufacturing Business Survey Committee, said on a conference call. “As long as demand remains strong, you can deal with the rest of the issues. Demand clearly is slowing.”
The PMI is considered a leading indicator, meaning it’s a sign of what may be ahead for the economy. The ISM report is based on a survey of 350 purchasing and supply executives. A reading above 50 percent indicates a growing manufacturing economy. Below 50 percent indicates economic contraction. The PMI has been above 50 percent for 33 straight months.
Fiore said 41 percent of comments in the May survey concerned tariffs, specifically the breakdown of trade talks between the U.S. and China.
That survey was completed before the Trump administration said last week it would begin levying tariffs on all goods imported from Mexico. The new tariffs will start at 5 percent on June 10. They will rise in 5 percent increments and could reach 25 percent by Oct. 1. The new tariffs are intended to pressure Mexico into providing more help in stemming the flow of migrants into the U.S.
Trump, in a tweet on June 2, said, “The problem is that Mexico is an ‘abuser’ of the United States, taking but never giving. It has been this way for decades.” The president, in a Friday night tweet, then said the planned tariffs were “indefinitely suspended” after Mexico agreed to provide more assistance to stem the flow of migrants into the U.S.
‘Not Going Away’
In any event, a manufacturing economy already experiencing slow growth may get hammered in the third quarter by tariffs. Tariffs are a tax placed on imports. They are paid by importers, who usually pass the costs onto their customers. Tariffs are not paid by one country to another.
“The China situation is not going away in the short term,” Fiore said.
The Mexico tariffs would have hit various industries, particularly hard impact on the auto industry. Automakers and suppliers over the past three decades have established supply chains where components pass back and forth the U.S.-Mexican border. Restructuring those supply lines may take years. The new tariffs had the potential to complicate ratification of a new U.S.-Mexico-Canada trade agreement intended to update the North American Free Trade Agreement (NAFTA).
The institute said 11 of 18 industries reported economic expansion in May. They included miscellaneous manufacturing and machinery. Six industries reported economic contraction, including primary metals and fabricated metal products.
ISM said its New Orders Index rose in May to 52.7 percent up from 51.7 percent the month before. While an improvement, Fiore said new orders “are sluggish. It’s not growing very much at all.”
The group’s Production Index slid to 51.3 percent, down from 52.3 percent. ISM’s employment index improved to 53.7 percent in May from 52.4 percent the month before.