Data out Monday showed activity in the manufacturing sector slowed in February while costs increased and employment contracted, as President Donald Trump’s tariff policies weighed on the sector.
The Institute for Supply Management’s manufacturing PMI registered a reading of 50.3 in February, down from January’s 50.9 reading and below the 50.7 economists had expected. Readings above 50 for this index indicate an expansion in activity, while readings below 50 indicate a contraction.
Meanwhile, the prices paid index surged to a reading of 62.4, up from 54.9 the month prior and its highest level since July 2022, reflecting company costs continuing to increase. The employment index fell into contraction with a reading of 47.6 in February, down from 50.3 in January.
All three major stock indexes hit their lows of the day following the release, with the Nasdaq Composite (^IXIC) sliding the furthest, down about 1% before paring back losses.
“Demand eased, production stabilized, and destaffing continued as panelists’ companies experience the first operational shock of the new administration’s tariff policy,” Institute for Supply Management Chair Timothy Fiore wrote in the release. “Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery stoppages and manufacturing inventory impacts.”
Fiore explained in an interview with Yahoo Finance that the surge in the prices paid index was largely due to Trump’s 25% tariffs on steel and aluminum imports.
“The whole story here is really around the tariff issue,” Fiore said, further explaining that the increases in prices lead to lower new orders from businesses and also could impact hiring plans. If Trump’s proposed 25% tariffs on Mexico and Canada are enacted, Fiore said he expects the situation to worsen, with prices continuing to increase and manufacturing activity further weakening.
“If you stay on the path that we’re headed on, I think it’s going to be tough, a tough route [for the US economy],” Fiore said.
ISM’s prices paid index has closely tracked the monthly prints of the Consumer Price Index (CPI) and the Producer Price Index (PPI), per Fiore. This month’s large increase in the prices paid index likely points to an increase in prices for the two inflation measures — CPI and PPI — in February, Fiore said.
Capital Economics North America economist Thomas Ryan wrote in a note to clients on Monday that the ISM data “supports our view that there will be a goods-driven resurgence in core inflation in the second half of the year.”
“The drop back in the ISM manufacturing index and the negative tone of the report will add to fears that the economy has taken a sudden turn for the worse amid the barrage of weaker activity data in recent weeks,” Ryan wrote.