March 3, 2025
The Institute for Supply Management’s index of conditions in the manufacturing sector declined 0.6 point in February to 50.3 after having risen 1.7 points in January and 0.8 point in December. For the last two months this index has been above the break-even level of 50.0. The last time that happened was March of last year.. A level of 50.3 is associated with a GDP increase of 2.2%.
The ISM organization does a similar survey for the services sector. The ISM index of conditions in the service sector for February will be released on Wednesday, March 5.
The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “Demand eased, production stabilized, and destaffing continued as panelists’ companies experience the first operational shock of the new administration’s tariff policy. Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery stoppages and manufacturing inventory impacts. Although tariffs do not go into force until mid-March, spot commodity prices have already risen about 20 percent. Twenty-four percent of manufacturing gross domestic product (GDP) contracted in February, down from 43 percent in January. The share of manufacturing sector GDP registering a composite PMI® calculation at or below 45 percent (a good barometer of overall manufacturing weakness) was 2 percent in February, a 6-percentage point improvement compared to the 8 percent reported in January. Of the six largest manufacturing industries, four (Petroleum & Coal Products; Food, Beverage & Tobacco Products; Chemical Products; and Transportation Equipment) expanded in February, equaling the number in January,”
Comments from respondents include the following:
- “The tariff environment regarding products from Mexico and Canada has created uncertainty and volatility among our customers and increased our exposure to retaliatory measures from these countries.” [Chemical Products]
- “Customers are pausing on new orders as a result of uncertainty regarding tariffs. There is no clear direction from the administration on how they will be implemented, so it’s harder to project how they will affect business.” [Transportation Equipment]
- “Tariff impact has been minimal to overall manufacturing and raw material supply. Limits on U.S. government spending in key organizations like the Food and Drug Administration, Environmental Protection Agency and National Institutes of Health are delaying some orders.” [Computer & Electronic Products]
- “Inflation and pricing pressure continue to drive uncertainty in our 2025 outlook. We are seeing volume impacts due to pricing, with customers buying less and looking for substitution options.” [Food, Beverage & Tobacco Products]
- “The incoming tariffs are causing our products to increase in price. Sweeping price increases are incoming from suppliers. Most are noting increases in labor costs. Vendors are indicating open capacity. Inflationary pressures are a concern. Our company is working diligently to see how the new tariffs will affect our business.” [Machinery]
- “Business is still slow, but some indications of improved demand are six to nine months out. Steel and scrap costs are increasing, and it’s too early to tell how high they will go.” [Fabricated Metal Products]
- “New orders continue to be strong after picking up in December. The uncertainty about tariffs keeps us cautious on spending, despite the strong sales right now.” [Electrical Equipment, Appliances & Components]
- “Management now has us running scenarios to project tariff impacts to our business. They want numbers in 24 hours on variables that equate to a wild guess. Interesting times we live in.” [Nonmetallic Mineral Products]
- “Internal analysis ongoing about impact of tariffs, but nothing concrete yet. General business conditions remain tepid; outlook on the durables side growing more pessimistic with growing domestic inventories of automobiles.” [Plastics & Rubber Products]
- “Customer volumes seem to be better than 2024. However, customers are still very hesitant to commit to long-term volumes due to the market uncertainty caused by proposed tariffs on steel/aluminum imports.” [Primary Metals]
The orders component declined 6.5 points in February to 48.6 after having risen 2.6 points in January and climbing 2.1 points in December. After climbing steadily for the past 3 months the orders component got hit fairly hard in February as tariffs uncertainty lead to a drop in orders. The New Orders Index hasn’t indicated consistent growth since a 24-month streak of expansion ended in May 2022. Fiore said, “Of the six largest manufacturing sectors, four (Petroleum & Coal Products; Machinery; Food, Beverage & Tobacco Products; and Chemical Products) reported increased new orders. The other two, Computer & Electronic Products and Transportation Equipment, reported declines. Panelists noted a weakening level of demand performance, with a 1.3-to-1 ratio of positive comments versus those expressing concern about near-term demand. Orders have also been impacted by discussions of which party will pay for potential tariff costs, causing a slowing in order placement. In addition, there is diminished confidence not only in additional interest rate cuts, but also the decline in long-term rates affecting durable goods and construction activity,”
The production component declined 1.8 points in February to 50.7 after having risen 2.2 points in January and having jumped 3.5 points in December. The production component was above the break-even level of 50.0 in both December and January. Fiore said that, “ “Production levels in February were similar to January’s performance, as order books remain weak and new orders remain elusive,”
The delivery performance of suppliers to manufacturing organizations rose 3.6 points in February to 54.5 after having risen 0.8 point in January and 1.4 points in December. This measure indicates the proportion of companies that are reporting slower delivery times. Hence, a reaching above 50.0 indicates that delivery times actually slowed slightly in February. ”Fiori noted that, “Supplier deliveries moved further into ‘slower’ territory, as suppliers struggled to meet accelerated delivery requests from customers (due to a potential ports strike and tariffs deployment) and as suppliers and panelists’ companies negotiate who pays for current tariffs, resulting in the slowing of some material deliveries,”
The employment index declined 2.7 points in February to 47.6 after having risen 5.0 points in January and having declined 2.8 points in December. “The index has returned to contraction after expanding for a single month. Since May 2022, the Employment Index has contracted 27 of the last 34 months. Of the six big manufacturing sectors, only one (Transportation Equipment) expanded employment in February. Respondents’ companies are continuing to reduce head counts through layoffs, attrition and hiring freezes. This action is supported by a second straight month with an approximate 1-to-1 ratio of hiring versus staff-reduction comments. Panelists are continuing to release employees as the business environment becomes more unclear.” An employment index above 50.3 is generally consistent with an increase in the BLS data on manufacturing employment.
The backlog of orders rose 1.9 points in February to 46.8 after having fallen 1.0 point in January and having surged by 4.1 points in December. Fiore noted that, “It appears that the extensive decline in order books has dramatically slowed, indicated by three months at moderate rather than significant contraction. By definition, the Backlog of Orders Index will be the last of the four demand indicators to enter expansion,”
Customer inventory levels fell 1.4 points in February to 45.3 after having been unchanged in January and having declined 1.7 points in December. Fiore said that “Customers’ inventory levels in February dropped into definitive ‘too low’ territory. Panelists are reporting that the amounts of their companies’ products in their customers’ inventories suggest a demand level that is positive for future production,”
With a big decline in the orders index and little change in customer inventories the ratio of orders to inventories fell 0.1 in February to 1.1 after having risen 0.1 in January. The 1.1 level for this index suggests that production should climb somewhat in the months ahead.
The prices paid component jumped 7.5 points in February to 62.4 after having risen 2.4 points in January and 2.2 points in December. Fiore noted that, “The Prices Index indicated increasing prices in February for the fifth consecutive month, driven by the dramatic increase in commodity prices as a result of new and potential tariffs. Mill materials (steel, aluminum and copper), food elements, plastics and natural gas registered increases similar to the prior month. The plastics increase reversed a decline. Thirty-one percent of companies reported higher prices in February, compared to 21 percent in January,”
After having risen 2.3% in the fourth quarter we expect GDP to expand at a 2.8% pace in 2025. The economy is showing numerous signs of uncertainty but, thus far, few signs of slowing down.
Stephen Slifer
NumberNomics
Charleston, S.C.
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