PMI slips as tariffs raise concern for managers

Index falls to 58.1% as demand remains strong, but global trade, employment remain issues.

By Bob Vavra, CFE Media August 1, 2018

With the issue of tariffs looming over the manufacturing sector, the Institute for Supply Management’s (ISM) monthly purchasing manufacturers’ index (PMI) slipped 2.1 percentage points in July to a still-robust 58.1%. While down from the 60.2% level in June, the PMI remains well above growth levels for the year and continues a nearly two-year growth spurt.

"Comments from the panel reflect continued expanding business strength. Demand remains strong, with the New Orders Index at 60% or above for the 15th straight month, and the Customers’ Inventories Index remaining low," said Timothy R. Fiore, chairman of the Institute ISM Manufacturing Business Survey Committee.

Fiore noted there was plenty of reason for optimism among manufacturing executives, and a few reasons for concern. "Demand remains robust, but the nation’s employment resources and supply chains continue to struggle," Fiore said in a press release. "Respondents are again overwhelmingly concerned about how tariff-related activity, including reciprocal tariffs, will continue to affect their business."

Those concerns were reflected in comments from ISM committee members. Among the comments:

  • "Global demand is still strong. Working on contingency plans for the Chinese tariffs. We will probably onshore most of that material. Labor availability is becoming an issue." (Computer & Electronic Products)
  • "As a result of new tariffs on materials to/from China, we are taking measures to move impacted materials ahead of effective dates, which in some cases is resulting in holding higher inventories." (Chemical Products)
  • "Steel cost increases are causing a lot of negotiations. The increases are real and will affect costs beginning in the third quarter of 2018." (Electrical Equipment, Appliances & Components)
  • "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." (Transportation Equipment)
  • "Corn and soybean meal costs are reducing. Labor continues to be a struggle to fill open positions." (Food, Beverage & Tobacco Products)
  • "The steel tariffs are a concern to us. We have already seen steel prices increase due to the threat of the tariffs and are seeing kickback from our customers due to the higher prices. We are concerned that the end customer will go to off shore to purchase the finished product." (Fabricated Metal Products)
  • "Business is moving along at a brisk pace, outperforming the annual plan year-to-date (calendar year financials). However, internationally, nationally and locally, we are finding many manufacturers behind schedule due to capacity constraints. They are stating their order intake is heavy and/or they cannot find qualified employees to get all the work done." (Machinery)
  • "Our customer demand is high, but supply of aluminum is tight. Also, tariffs are negatively affecting our bottom line, as we are unable to pass increases to all of our customers. Plus, we are seeing increases in our construction costs because of the steel price increases. Labor market is extremely tight for professional personnel, plant technicians and support associates." (Primary Metals)
  • "The so-called trade war is now taking its toll on business activity, resulting in substantial reductions to new export orders. China has all but stopped taking orders, causing inventories to build up in the U.S. Domestic business is steady. However, it is too small to carry the load that export markets have retreated from. As a result, we will be meeting as a corporation next week to recast our second-half sales and revenue projections." (Wood Products)

The PMI has been above the 50% growth level for 23 straight months, and the index is averaging a 59.1% reading for the year.

Bob Vavra, content manager, CFE Media,