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Although the U.S. and China have reached a cease-fire on new tariffs, the electronics supply chain remains chaotic, one executive told the Institute for Supply Management. “China tariffs and pending Mexico tariffs are wreaking havoc with supply chains and costs. The situation is crazy, driving a huge amount of work [and] costs, as well as potential supply disruptions.”
The commentary – part of the ISM’s June manufacturing report on business – was echoed in other market sectors. “Tariffs continue to be a challenge. We are concerned about the implementation of Mexican tariffs and the cost pressures it will have on our Latin American business,” said a petroleum and coal executive.
“Tariffs continue to adversely impact decisions and forecasting,” said a manager in fabricated metal products. “Our increasing fear is that current trends will weaken the global economy, influencing our ability to grow in 2020 and beyond.”
It’s been a year since the first round of tariffs on foreign goods was implemented by the United States. Manufacturers have been able to mitigate the impact of the levies, but they remain a headwind for domestic output. June was the third consecutive month the ISM’s Purchasing Manager’s Index (PMI) has declined. June’s index reached 51.7 percent, down 0.4 percent from May. An index above 50 indicates expansion, but factory growth has been testing the brakes for the last few months.
Source: Institute for Supply Management
Demand expansion ended in June, with the ISM’s new orders index recording zero expansion. “The customers’ inventories index remains at a too-low level, and the backlog of orders index contracted for the second straight month,” according to Tim Fiore, chair of the ISM’s manufacturing business survey committee. “New export orders remain weak.”
New orders registered 50 percent in June, a decrease of 2.7 percentage points from May. Backlog contracted for the second straight month.
On the other side of the scale, Fiore said, the production index registered 54.1 percent, a 2.8-percentage point increase from May. Employment reached 54.5 percent, up 0.8 percent from the prior month. Inventories were down 1.8 percentage points from May, and the prices index, at 47.9 percent, dropped 5.3 percent from the May level of 53.2.
“One of the concerns we have is that the trend in the U.S. reflects a global slowdown in manufacturing,” said Steven Rosen, co-CEO of private equity firm Resilience Capital Partners. “U.K. manufacturing is at a six-year low, and Chinese manufacturing has declined as well. My firm has portfolio companies with operations in both the U.K. and China, so we are watching this very closely.”
New export orders declined slightly in June, according to the ISM.The high-tech sector is particularly sensitive to trade policies impacting Mexico and China, where U.S. companies have outsourced their manufacturing.
“Respondents expressed concern about U.S.-China trade turbulence, potential Mexico trade actions and the global economy,” Fiore said. A long-term component shortage has already impacted the electronics industry, he added, with trade policies taking some goods “off the table” for the time being. “The president has found this economic weapon. Trade is 16 percent of the gross domestic product so if global [trade] is down, it will affect manufacturing,” Fiore said.
The U.S. should stay its course on trade policy, some experts believe. “The resolution of the trade dispute with Mexico was a positive for manufacturing, since the proposed tariffs would have had a real impact both on the prices American consumers pay for goods and on American jobs, since so many manufacturing supply chains originate in Mexico,” said Rosen. “I’ve long been confident that the U.S. commitment to open trade will ensure a common-sense resolution to the tensions with China. I think that commitment will outweigh the very real – but ultimately transitory – political, economic and financial issues separating the two nations.”
Global tax and advisory firm KPMG does not expect a resolution in the U.S.-China trade war by the close of 2019. “The temporary agreement does not resolve the fundamental conflicts over trade issues that broke down talks in May and isn’t a sustainable solution for Huawei [a security concern for the U.S.],” said Alexander Kazan, chief strategy officer for KPMG’s Eurasia Group, in the webinar Year One – Lessons Learned in the First Full Year of §301 Tariffs. “The agreement somewhat reduces the chances of further tariff escalation this year, while increasing the chances that the sides keep existing tariffs in place, perhaps through the end of the U.S. campaign cycle in 2021.”
Rosen points out the domestic PMI remains above 50, indicating continued growth but at a slowing pace. “[June] is the third straight month of slowing PMI expansion,” Rosen said. “This is to be expected, given the headwinds facing the manufacturing sector, everything from tariffs and trade tensions to fluctuating currencies to flagging production in some regions.”
“There are real risks in the U.S.-China negotiations,” he added. “One is that policymakers in either country could see trade not in economic terms but as just another element in a broader strategic rivalry or as a factor in domestic politics. That could result in misjudgments and unexpected – and unintended – consequences.”
Hailey McKeefry contributed to this report
