By Lucia Mutikani
WASHINGTON (Reuters) -U.S. manufacturing was steady in February, but a measure of prices at the factory gate jumped to nearly a three-year high and it took longer for materials to be delivered, suggesting that tariffs on imports could soon undercut production.
Worries about duties on imports dominated commentary from manufacturers in the Institute for Supply Management (ISM) survey on Monday, with most saying the tariffs being pushed by President Donald Trump against trading partners such as Canada, Mexico and China had created an uncertain operating environment.
Coming on the heels of weak consumer spending, a surge in the goods trade deficit and a decline in homebuilding in January, the survey reinforced views that the economy lost significant momentum early in the first quarter. Some economists are expecting gross domestic product contraction this quarter.
Trump was expected to decide on Monday what levels of tariffs he would impose early on Tuesday on Canada and Mexico.
“This likely marks the beginning of the end of the recent mini-renaissance, as the reality of the disruption to the sector caused by tariffs, including retaliatory action by trading partners, starts to set in,” said Thomas Ryan, North America economist at Capital Economics.
The ISM’s manufacturing PMI slipped to 50.3 last month from 50.9 in January, which marked the first expansion since October 2022. A PMI reading above 50 indicates growth in the manufacturing sector, which accounts for 10.3% of the economy.
Economists polled by Reuters had forecast the PMI would ease to 50.8. Production at factories nearly braked after rebounding in the prior month. The dip in the PMI mirrored declines in other sentiment measures as the Trump administration pushes ahead with its plan to ratchet up tariffs on imported goods.
Domestic manufacturers rely heavily on imported raw materials. Analysts have warned of financial fallout for U.S. automakers and other companies that manufacture vehicles in Mexico and Canada and sell them in the U.S. Other duties aimed at imported steel, aluminum and motor vehicles will either soon go into effect or are in fast-track development.
Manufacturing only just started recovering after a prolonged downturn triggered by the Federal Reserve’s aggressive monetary policy tightening in 2022 and 2023 to tame inflation. Concerns that tariffs will raise prices contributed to the U.S. central bank’s decision to pause its interest rate cuts in January.
Ten industries, including miscellaneous manufacturing, primary metals, wood products and transportation equipment reported growth last month. Among the five industries reporting contraction were furniture and related products, machinery as well as computer and electronic products.
NEW ORDERS SLUMP
Some manufacturers of chemical products reported that “the tariff environment regarding products from Mexico and Canada has created uncertainty and volatility among our customers and increased our exposure to retaliatory measures from these countries.
Similar sentiments were echoed by makers of transportation equipment who noted that customers were pausing new orders, adding “there is no clear direction from the administration on how they will be implemented, so it’s harder to project how they will affect business.”
Makers of primary metals said while customer volumes appeared to be better than 2024, “customers are still very hesitant to commit to long-term volumes due to the market uncertainty caused by proposed tariffs on steel and aluminum imports.”
Some in the computer and electronic products industry said government spending limits on agencies like the Food and Drug Administration, Environmental Protection Agency and National Institutes of Health were delaying some orders.
U.S. stocks were trading lower. The dollar slipped against a basket of currencies. U.S. Treasury yields were mostly lower.
The ISM survey’s forward-looking new orders sub-index slumped to 48.6 last month from 55.1 in January. Its measure of prices paid by manufacturers for inputs surged to 62.4, the highest reading since June 2022. It topped a forecast of 55.8 and was up from 54.9 in January.
At face value this reading suggests goods prices could continue rising after increasing by the most in 11 months in January. Goods prices had largely been muted since last May.
“Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery stoppages and manufacturing inventory impacts,” said Timothy Fiore, who chairs the ISM’s Manufacturing Business Survey Committee. “Spot commodity prices have already risen about 20%.”
Suppliers’ delivery performance slowed considerably. The survey’s supplier deliveries index increased to 54.5 from 50.9 in January. A reading above 50 indicates slower deliveries.
A lengthening in suppliers’ delivery times is normally associated with a strong economy, which would be a positive contribution to the PMI. But in this case slower supplier deliveries indicated bottlenecks in supply chains.
Imports grew further as factories were front-loading materials, boosting inventories. Factory employment, which expanded in January for the first time in eight months, contracted as firms laid off workers. The manufacturing jobs index dropped to 47.6 after rebounding to 50.3 in January.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)
