U.S. Manufacturing Contracts as Steel Tariffs Loom Large

The U.S. manufacturing index contracted for the fourth straight month in November -- just as the Trump administration resurrected steel and aluminum tariffs on Argentina and Brazil. Global trade issues, according to the Institute for Supply Management, remain the top cross-industry concern for America’s manufacturers as the year ends.

The ISM’s PMI dropped by 0.2 percentage points in November to 48.1, dragged down by new orders and overall stalled demand. New orders slid to their lowest level since 2012 with a 1.9 percent drop to 47.2. Any number above 50 indicates manufacturing expansion.

“November was ‘more of the same,’” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. “It’s the story of shrinking demand.” Business levels in the computer and electronic products sector were similar to October, one executive told the ISM.

October showed some improvement from the prior month, but November erased those gains. Manufacturers are digging into their backlog and inventory to meet customer demand.

"Everyone wants to close the year strong,” Fiore said. “So far, manufacturers have been able to match backlog and inventory with demand. But I think the inventory number must be watched closely as backlog is consumed. We are seeing an up-then-down trend that will continue through the year’s close.”

Order backlog dropped by 1.1 percent in November to a level of 43 percent. Employment registered 46.6 percent, a 1.1-percent decrease from October. Inventories reached 45.5 percent, down 3.4 percentage points from the prior month.

“As we’ve seen, the market is unpredictable,” Fiore said, and that’s causing anxiety among U.S. manufacturers. Businesses are holding tight to their capital expenditure budgets because the trade environment is so volatile.

“Today, we had the Trump administration throw tariffs on steel with no prior notice,” said Fiore. “So why would companies risk millions of dollars to upgrade or expand when the environment is so unpredictable?” Capex, at best, is in a holding pattern.

The U.S. fabricated metals sector is already in upheaval, one executive told the ISM. “The order book continues to shrink below our forecast levels. We’re unsure at this point how much of the slowdown is tied to certain events [like the General Motors strike], year-end inventory reductions by customers, or a worsening economy.

“We don't expect clarity on this until early 2020,” the manager continued, “when we expect to either see restocking orders [a good sign] or not [a bad sign].”

At some point, inventories will have to be replenished, but factories have little incentive to plan ahead. Prices remain soft, so companies are waiting until the last minute to place orders.

“You have companies sitting there with a bad budget waiting for the last minute to possibly lock in a price variance,” Fiore said. “Lead-times have come in, so that means they can wait it out. Backlog and inventories are low, so that portends well for future demand.”

The ISM is not in the business of forecasting, but manufacturing is expected to remain flat through the rest of the year. On a more positive note, production rose in November by 2.9 percent to 49.1.

“The last time we saw this pattern – demand softening then contracting – it lasted about eight to 10 months,” Fiore said. “We are now in the fourth month of contraction.” The industry might see numbers above 50 by March, he concluded.