Tariff worries had abated in recent months, according to Tim Fiore, chair of the ISM’s manufacturing business survey committee, then suddenly escalated. “It appeared we were ready for all this to go away and then [a potential agreement] blew up in May,” Fiore said. “About 41% of comments this month were tariff-related, up from 12 to 14% only a few months ago.”

Purchasing managers are contending with a tariff increase from 10% to 25% on billions of dollars’ worth of Chinese products. “Ongoing tariffs [issue is] impacting costs and influencing supplier realignment on country of origin,” a computer and electronic products executive told the ISM. “Border issue is causing delays in imports from Mexico.”

The tariff threat on Mexico was a surprise and would be a big deal, Fiore said. “If this happens as planned we are talking about trillions of dollars of goods from Mexico and China and about $250 billion worth of economic potential.”

U.S. factories reported their weakest output since August of 2016 as May’s production index dropped one percent to 51.3. New orders improved by a single percentage point to 52.7. Any number above 50 indicates manufacturing is expanding; a number below 50 indicates contraction.

“Demand expansion continued, with the new orders strengthening but remaining in the low 50s,” Fiore said. “Customers’ inventories are too low for the 32nd consecutive month, remaining below preferred levels. The index registered its highest level since April 2018, when it registered 44.3%. The ‘too low’ status continues to indicate future production growth potential,”

Backlog contracted for the first time since 2017, dropping below 50 --the baseline between expansion and contractions. “That’s pretty alarming,” Fiore said. “These are orders that have been received but manufacturers were not able to ship.”

There were some bright spots for the industry—in addition to production, employment expanded at marginally higher levels compared to April. “The index recorded the single biggest gain of the five PMI sub-indexes,” fire said; respondents reported hiring of recent college graduates, increases in temporary labor to support seasonality, and in some cases, deferring hiring due to economic uncertainty,” says Fiore.

Inputs — expressed as supplier deliveries, inventories and imports — were lower this month, primarily due to inventory softening and supplier’s continuing to deliver faster, resulting in a combined 4.6-percentage point reduction in the supplier deliveries and inventories indexes. Imports contracted for the second straight month.

“Overall, inputs reflect supply chains’ ability to respond faster and indicate that supply managers are closely watching inventories,” Fiore said. his is the 39th straight month of slowing supplier deliveries, with the index indicating a period of supplier delivery improvement after four months of stability, but with higher stress. Supplier deliveries are improving, with many respondents noting more readily available supplier inventory, faster supplier response times, and generally suppliers ‘catching up’ despite land- and river-transportation bottlenecks. Supplier deliveries recorded their lowest level of difficulty since October 2016, when the index registered 51.5%,” says Fiore. A reading below 50% indicates faster deliveries, while a reading above 50% indicates slower deliveries. “Prices remain at a relatively stable level.”

Steel prices, Fiore added, have fallen below nominal levels, which is a bad signal for the rest of 2019. U.S. tariffs on steel and aluminum were dropped, “but I’m not sure if those tariffs were dropped too late,” he said. “As a rule, if steel prices are strong in the April-May time frame it’s positive for the economy. If they drop, it’s an indication that there will not be a strong GDP for the second half of the year.”

Nevertheless, comments from the panel reflect continued expanding business strength, but at softer levels consistent with the early-2016 expansion.

“Business continues to be very strong,” said a machinery manufacturer. “Our company and our supply base continue to be challenged getting manpower for production. Key commodity costs like steel have continued to come down. Lead times with suppliers have stabilized after moving out two to three times what they were a year ago. Supply base performance has improved over the last 90 days and stabilized.”

Respondents feel they have a good amount of business that they are comfortable with, Fiore concluded, “and they’re not canceling orders.”

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Tariffs Continue to Stunt U.S. Manufacturing Growth