By Lucia Mutikani
WASHINGTON (Reuters) -U.S. 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 specter of lackluster 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 U.S. 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 panelists’ 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 U.S., set import taxes on goods from China for the same reason, launched hefty duties on imports of steel and aluminum 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 U.S. industrial base.
But economists have criticized 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 U.S. products could become a reality.”
Stocks on Wall Street were higher. The dollar was steady against a basket of currencies. U.S. Treasury yields fell.
RECESSION ODDS RISING
Economists at Goldman Sachs now see a 35% probability of a recession over the next 12 months, up from 20% previously, reflecting the sharp deterioration in consumer and business confidence as well as “statements from White House officials indicating greater willingness to tolerate near-term economic weakness in pursuit of their policies.”
Domestic manufacturers rely heavily on imported raw materials and could experience a severe disruption in supply chains, economists warned.
The ISM survey’s forward-looking new orders sub-index sagged to 45.2, the lowest reading since May 2023, from 48.6 in February. Production at factories declined. The survey’s measure of prices paid by manufacturers for inputs jumped to 69.4, the highest level since June 2022, from 62.4 in February.
That data suggest goods inflation could continue rising and contribute to elevated price pressures. A measure of underlying inflation increased by the most in 13 months in February.
Suppliers’ delivery performance remained slow last month. The survey’s supplier deliveries index edged down to 53.5 from 54.5 in February. A reading above 50 indicates slower deliveries.
The flow of imports slowed considerably, suggesting the front-loading of raw materials by businesses seeking to avoid higher prices from tariffs was waning. This front-loading had likely accounted for some of the rise in the manufacturing PMI in the prior two months.
Factories continued to shed jobs, which could accelerate as import duties start to bite. The survey’s measure of manufacturing employment fell to 44.7 from 47.6 in February.
The ebbing demand for labor was underscored by a separate report from the Labor Department showing job openings, a measure of labor demand, dropped 194,000 to 7.568 million by the last day of February. The job openings rate fell to 4.5% from 4.7% in January. The retail sector had 126,000 fewer vacancies while unfilled jobs in wholesale trade decreased by 56,000.
There were also fewer job openings in financial activities, healthcare and social assistance, accommodation and food services as well as manufacturing.
But federal government job openings increased by 6,000 despite a hiring freeze imposed by the Trump administration as part of an unprecedented campaign to slash spending.
Layoffs increased 116,000 to a still-low 1.790 million. They were concentrated in the retail and professional and business services sectors. Federal government layoffs rose by 18,000.
The hires rate was 3.4% for a third straight month. With the economy’s outlook shaky and hiring tepid, workers are staying put. Resignations declined by 61,000 to 3.195 million, keeping the quits rate at 2.0%.
“The jobs market remains the economy’s bulwark, and while it’s eroding slowly, it’s not showing cracks that foreshadow recession,” said Robert Frick, corporate economist with Navy Federal Credit Union. “How it holds up to assaults from tariffs’ effects on consumers and businesses is the crucial question.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)
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