US manufacturing slips back into contraction as tariffs angst mounts

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.

The Institute for Supply Management (ISM) said on Tuesday that 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 slipping to 49.5. Manufacturing started turning around at the beginning of the year after a lengthy recession triggered by the Federal Reserve's aggressive interest rate hikes in 2022 and 2023 to tame inflation. But the nascent recovery appears to have been snuffed out by President Donald Trump's barrage of tariffs.

Trump, since returning to the White House in January, has announced and delayed tariffs on Canada and Mexico for 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. Business and consumer sentiment have nosedived. The U.S. central bank paused rate cuts in January while policymakers monitored the impact of the tariffs on economic activity.

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 suggests 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 a waning in front-loading of raw materials, which had been driven by businesses seeking to avoid higher prices from tariffs. This 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.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)