US manufacturing contracted in March after growing for two straight months, while a measure of inflation at the factory gate jumped to the highest level in nearly three years amid rising anxiety over tariffs on imported goods. Anecdotes from the Institute for Supply Management survey on Tuesday offered a gloomy assessment of business conditions, with tariffs cited as a major factor by manufacturers.
President Donald Trump’s wave of tariffs has eroded business and consumer confidence. The survey added to data, including tepid consumer spending, that have raised the spectre of lacklustre economic growth and higher inflation. That could put the Federal Reserve, which paused its easing cycle in January to allow its policymakers to monitor the impact of the tariffs, in an uncomfortable position.
“Rising prices while business activity slows imply the economy could be heading into stagflation,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed finds themselves in a tough spot because shaky corporate and consumer confidence could slow spending, leading to more than just a slowdown.”
The ISM said its manufacturing PMI dropped to 49.0 last month from 50.3 in February. 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 slip to 49.5.
Manufacturing started turning around at the beginning of the year after a lengthy recession triggered by the US central bank’s aggressive interest rate hikes in 2022 and 2023 to tame inflation. But the nascent recovery appears to have been snuffed out by Trump’s tariffs.
“Demand and production retreated and destaffing continued, as panellists’ companies responded to demand confusion,” said Timothy Fiore, who chairs the ISM’s Manufacturing Business Survey Committee. Trump, since returning to the White House in January, has announced and delayed tariffs on Canada and Mexico over what he alleges is their role in allowing the opioid fentanyl into the US, set import taxes on goods from China for the same reason, launched hefty duties on imports of steel and aluminium and slapped a 25% levy on imported cars and light trucks.
Trump promised to announce global reciprocal tariffs on Wednesday, which he has dubbed “Liberation Day.” He sees tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining US industrial base.
But economists have criticised the import duties as inflationary and detrimental to the economy.
Nine industries including textile mills, primary metals, computer and electronic products as well as transportation equipment and electrical equipment, appliances and components grew last month. Among the seven industries reporting a contraction were machinery, wood, paper and chemical products.
Some makers of electrical equipment, appliances and components said there was “no evidence of growing demand,” adding that “tariff impacts and mitigation strategies are a daily conversation.” Machinery manufacturers said “business condition is deteriorating at a fast pace.” While some makers of fabricated metal products reported better-than-expected orders growth, they noted that customers could be “trying to build inventory at current prices to get ahead of expected tariff and related cost increases.” Computer and electronic products manufacturers said “customers are pulling in orders due to anxiety about continued tariffs and pricing pressures.”
Producers of food and beverages reported they were “starting to see slower-than-normal sales in Canada, and concerns of Canadians boycotting US products could become a reality.” Stocks on Wall Street were higher.