Even though U.S. manufacturing activity remains robust — the nation’s leading production index, the PMI, registered 58.1 percent in July — the industry’s concern over tariffs has reached a new high, according to the Institute for Supply Management.
The demand picture for U.S.-made goods remains positive, said Tim Fiore, chair for the ISM’s manufacturing business survey committee. A PMI number reading above 50 indicates the industry is expanding. However, 49 percent of U.S. procurement executives surveyed in July mentioned tariffs as a concern, up from 38 percent in June.
“[We are] working on contingency plans for the Chinese tariffs,” a computer and electronic products executive told the ISM. “We will probably onshore most of that material.”
July’s manufacturing pace cooled a bit from June when the PMI reached 60.2. July’s 58.1 reading is still a very strong number, said Fiore. July’s PMI sub-indices tell an interesting story. The new orders index registered 60.2 percent, a decrease of 3.3 percentage points from the June reading of 63.5 percent; and the production index registered 58.5 percent, a 3.8 percentage point decrease from June’s 62.3 percent.
“Normally, a dip in the production index would raise an eyebrow,” Fiore said.
The industry is undergoing an adjustment, he explained. “What we are seeing is a move toward normalization between supplier deliveries and inventory.”
Businesses have now factored steel lead times into their production schedules, Fiore said. “People now understand that they might be paying more for steel and aren’t shopping around until the last minute. They are offsetting that [price increase] in another way.”
Even though supplier deliveries slowed — declining by 6.1 percent in July — and inventory increased by 2.5 percent, supply chain pressures are abating, he said. “Inputs — expressed as supplier deliveries, inventories and imports — had expansion increases, due primarily to negative supply chain issues, but at easing levels compared to the prior month.”
But respondents are again overwhelmingly concerned about how tariff-related activity, including reciprocal tariffs, will continue to affect their business, Fiore said. New export orders decreased by 1 percent in July, but several U.S. industries are being heavily impacted by tariff uncertainty.
“Transportation exports contracted in July,” Fiore said, “and that encompasses cars, buses, trains and airplanes; and we saw a contraction in chemical products. I think the automotive industry has gotten used to the steel and aluminum tariffs and that has stabilized; the issue for manufacturers is now sales and revenue outside the United States. There’s a lot of discussion about where the best place is to manufacture, and a lot of conversation about moving offshore.”
A procurement manager in the electrical equipment, appliances and components industry told the ISM: “Steel cost increases are causing a lot of negotiations. The increases are real and will affect costs beginning in the third quarter of 2018.” A transportation equipment executive said the company was “reviewing the business case for importing manufactured parts from China, as new tariffs will lead to increased costs that we will pass along to our domestic customers.”
Tariffs may also exacerbate an already-strained supply of electronic components – many of which are produced in the Asia-Pacific region. Companies are increasingly delaying capital expenditures because of uncertainty over an impending trade war. Component manufacturers have already been conservative in capacity expansion, and component shortages are expected to continue.
The ISM has continued to refine the categories of electronics components that its members say are in short supply. In July, respondents reported that capacitors have been in short supply for 13 months; electrical components for four; electronics components for three; ICs, memory and resistors for nine. The only other commodities in short supply during July were aluminum, fabricated metal products, nylon and steel-based products.