US manufacturing PMI picks up in May – Tariffs related
The headline index from the report, the seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®), posted 52.0 in May. That was up from readings of 50.2 in the preceding two months and represented solid overall growth which was the best since February’s recent high.
May’s improvement in the PMI was driven by an uplift in new orders and an outsized contribution from input inventories which, in 18 years of data collection, rose at an unprecedented pace. Similar factors drove growth in both instances – efforts by manufacturers and their clients to front-run tariff related increases in prices and supply-side disruption.
For new orders, which rose to the strongest degree in three months, demand from within the United States was noted as the primary driver of growth as international sales remained relatively subdued, rising only slightly following April’s steep fall. Trade policies and tariffs continued to weigh on foreign demand, according to panelists.
Despite the uplift in order books, production volumes were trimmed marginally for a third month in a row. Capacity was also broadly sufficient to deal with the dual requirements of both incoming and existing orders as backlogs of work fell again, albeit modestly. Firms also added to their finished goods inventory, which rose for the first time since last November.
An increase in labor capacity was registered in May, with a net increase in employment signaled for the first time in three months. However, growth was only marginal, with some firms noting difficulties in finding suitable workers to fill vacancies.
Tariffs helped explain another steep increase in manufacturing input prices during May. Latest data showed that raw material price inflation remained high, despite dropping to a three-month low, amid reports that suppliers were passing on tariff related cost increases. Supplier delivery delays were also noted, linked to growing stock shortages at vendors. The degree to which supplier performance worsened was the steepest for over two-and-a-half years.
In response to higher input costs, factory gate prices were also raised in May, and to the greatest degree since November 2022.
Finally, manufacturers are hopeful of a more stable trading environment in a year’s time, with growing expectations among the panel that disruption to markets caused by tariffs will dissipate in the months ahead. This helped to explain why confidence in the outlook improved in May to a three-month high – and to a level fractionally above the survey average
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
“The rise in the PMI during May masks worrying developments under the hood of the US manufacturing economy. While growth of new orders picked up and suppliers were reportedly busier as companies built up their inventory levels at an unprecedented rate, the common theme was a temporary surge in demand as manufacturers and their customers worry about supply issues and rising prices.
“These concerns were not without basis: supplier delays have risen to the highest since October 2022, and incidences of price hikes are at their highest since November 2022, blamed in most cases on tariffs. Smaller firms, and those in consumer facing markets, appear worst hit so far by the impact of tariffs on supply and prices.
“Encouragingly, manufacturers regained some optimism in May after sentiment had been hit hard by tariff announcements in April, partly reflecting the pauses on new levies. However, uncertainty clearly remains elevated amid the fluid tariff environment, and factories have so far shown a reluctance to expand headcounts in the face of such volatility.”
The ISM survey outlines the “worrying developments”:
Manufacturing activity retreated again in May, notching the fourth-straight monthly decline for the ISM manufacturing index amid a measurable deterioration in trade-related activity. That is not to suggest that things were going swimmingly before the recent escalation in trade tensions. To be sure, the headline index failed to register even a single month on the good side of 50 in all of 2023 and 2024.
But in the wake of the election, the factory sector had regained a little lost swagger. After sinking to its lowest level of 2024 in October, the ISM rose for three-straight months amid hopes for less regulation and lower taxes. January marked the not-quite nose-bleed-inducing summit of just 50.9. The ensuing descent for the manufacturing sector has occurred against a backdrop of an ever-changing and increasingly Byzantine list of tariffs that is sowing confusion for American industry and is impacting U.S. firms’ orders from abroad.
In the fabricated metals space, one respondent illustrated this concept with the very direct observation that “tariff uncertainty is impacting new international orders. Tariffs are also the main reason our Asia customers are requesting delayed shipments.”
While the indexes for import and export orders do not feed directly into the headline measure, they do offer an empirical way to measure how broadly these trade issues are impacting businesses. The export orders measure dropped to 5-year low of 40.1 and the imports measure fell to 39.9, a level not seen since 2009 when the global financial crisis slowed global trade to a crawl.
Source: Institute for Supply Management and Wells Fargo Economics
Four of the five indexes (production, new orders, supplier deliveries, inventories, employment) that feed into the headline ISM index rose last month, though all but one remain consistent with contraction. Inventories was the only component to slip and supplier deliveries is the only that remains in contraction, both of which reflect tariff pressure.
The measure of current activity—production—rose in May after hitting a historically-low level in April, but at 45.4, it’s still consistent with some of the lowest-levels of activity outside the pandemic in the last couple of decades. It’s little surprise that new demand remained constrained with the new orders index barely budging and registering contraction for the fourth straight month. In the context of on-again, off-again tariff policy, most businesses are left sitting on their hands as they await any sign of more-persistent clarity.
The prices paid index came down slightly, but continues to run at a level consistent with higher cost pressure in the manufacturing sector. “We have entered the waiting portion of the wait and see, it seems. Business activity is slower and smaller this month. Chaos does not bode well for anyone, especially when it impacts pricing.” The employment metric also continues to be consistent with layoffs in the sector.
Source: Institute of Supply Management and Wells Fargo Economics
It also looks to be getting a bit more challenging to get inputs as well. The supplier deliveries index rose to 56.1, given this is an inverse metric this is consistent with some of the longest wait times for needed inputs in nearly three years. This measure is something to pay attention to. Not only will longer delivery times signal trade-related supply chain disruptions, but as we detailed in a note last week, it could boost the headline ISM in coming months and overstate the health of the manufacturing sector.
Current supply challenges are already reminiscent of the pandemic for some—a respondent from the Electrical Equipment, Appliances & Components industry said, “The administration’s tariffs alone have created supply chain disruptions rivaling that of COVID-19.” Another from the Computer & Electronic Products industry said, “…No one is willing to take on inventory risk.” The drop in the inventories index comes as the pull-forward in demand looks to have run its course, leading inventories back into contraction.
There is ultimately no industry untouched by tariffs and the selected respondent comments summarize an uncertain and chaotic environment. Purchasing managers are reporting softening demand conditions, increased cost pressure and declining profitability.
From NBC:
After U.S. businesses massively front-loaded international orders in the first quarter to avoid tariffs imposed by the Trump administration, a swing back was to be expected in the second quarter. However, the reversal appears to be much more dramatic than anticipated.
Trade balance data published last Friday showed a 19.8% decline in goods imports in April—the largest monthly drop since records began in 1989. Goods exchanges do not appear to have rebounded in May, judging from the ISM Manufacturing Report published this morning.
As today’s Hot Chart shows, the sub-index tracking new export orders came in at just 40.1—a level never seen outside of recessionary periods. Meanwhile, the import index saw its third-largest monthly decline in history (-7.2 index points) and stood at its lowest level since the Great Recession (39.9).
The collapse of trade in the second quarter will affect economic data in different ways depending on the country. In the United States, it should result in higher-than-expected GDP growth, with sinking imports acting as a major boost. Elsewhere, however, the impact will be the opposite. A decline in exports will indeed act as a drag on growth among the United States’ trading partners, notably Canada. The impact could be significant for the manufacturing sector, which has already been experiencing a decline in production and jobs for several months.
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China: PMI signals first deterioration in operating conditions in eight months
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Canada: Output and new orders fall sharply
The S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI®) posted 46.1 in May. That was slightly up on April’s 45.3 but nonetheless below the critical 50.0 no-change mark for a fourth month in a row. (…)
International demand remained especially hard hit, with new export business again declining to a steeper degree than overall sales. Trade with the neighbouring United States was again reported to be weak. (…)
Price data meanwhile showed an acceleration of input cost inflation. There was again evidence that tariffs had led to a general uplift in input costs, with vendors reportedly raising their charges. Latest data showed a marked overall increase in output charges,
despite the rate of inflation dropping to a three-month low.
Mexican manufacturing sector contracts further in May
Despite rising from April’s 50-month low of 44.8, the headline index posted 46.7, pointing to a solid decline in business conditions.
New orders shrank markedly and for an eleventh month running during May. A substantial drag on sales volumes came from abroad, with new export business decreasing at the second-fastest rate since February 2021. US tariffs were once again widely cited as a drag on demand for Mexican goods (…).
May survey data signalled steep cost pressures for Mexican manufacturers. Although the rate of increase in input prices eased, it remained elevated. Unfavourable exchange rate movements were cited by panellists, as were price hikes from vendors and US tariffs.
Prices charged rose, albeit only marginally and at a softer pace.
Other Asian PMIs released yesterday paint a broadly similar picture:
- Japan: Total new business fell modestly, with lower sales generally linked to subdued demand conditions amid US tariffs and increased client hesitancy. The decline in new export orders also moderated since April, but remained solid overall.
- Vietnam: New business from abroad declining at a much faster pace than total new orders.
- Indonesia: Manufacturers signalled particular falls in exports to the US.
- Taiwan: New export orders declined at the steepest pace in nearly a year-and-a-half.
- South Korea: New orders fell at the fastest pace since June 2020, and the strongest rate in almost a decade if the COVID-19 pandemic period is excluded. Respondents particularly mentioned the US as a source of falling new export orders.
New orders are manufacturers’ lifeblood. Trade is about to slow meaningfully.
(Bloomberg)
Revenues from Tariffs Spiked to $23 Billion in May, up by 168% in 3 Months
Collections from customs and certain excise taxes spiked by $6.5 billion, or by 37.5%, in May from April, to $24.0 billion, nearly triple the average monthly collections in 2024 ($8.2 billion), according to the Treasury Department’s daily data today.
Over the past three months, they spiked by $15 billion, or by 168%.
This $24.0 billion is the amount in customs and excise taxes that the Department of Homeland Security – which includes Customs and Border Protection – transferred in May into Treasury Department’s checking account at the Fed, the Treasury General Account. This total of $24 billion includes a small amount in “certain excise taxes” (in April, $1.1 billion). The rest is from tariffs – so, roughly $23 billion in receipts from tariffs.
At May’s pace, these customs and excise taxes would amount to $288 billion per year, up by $190 billion from 2024. (…)
OECD Warns That World Growth to Slow Amid Trade Turmoil The global economy is now set to grow by 2.9% this year and next, a downgrade from previous forecasts
Collectively, the global economy is now set to grow by 2.9% this year and next, the OECD said in its quarterly report released Tuesday. That marks a downgrade to the group’s previous forecasts, which saw growth at 3.1% in 2025 and 3% in 2026, and suggests the world economy is set to slow from the 3.3% expansion it booked last year. (…)
The U.S. itself will be among the economies worst hit, the group said. The world’s largest economy is set to grow just 1.6% this year, a sharp deceleration from 2024’s 2.8% and lower than OECD’s previous forecast of 2.2% for the year, as a result of Trump’s tariffs, wider policy uncertainty, lower net immigration and cuts to federal workforces, the group said. (…)
Mexico and Canada, which are particularly vulnerable to a hit to their trade with their common neighbor, will also see sharp slowdowns in growth this year, according to the forecasts. The Mexican economy will grow just 0.4%, while Canada’s economy will expand by 1.0%, the OECD expects. (…)
In the average wealthy economy, investment is set to take a sustained hit in the current environment, similar to the damage dealt by previous global shocks such as the global financial crisis and the Covid-19 pandemic, Pereira said.
“We would not be surprised to see investment come down again,” he said. “That’s why substantial policy support for housing investment, business investment, and public investment is key so that we can bring more investment to the table and more growth to the economy.” (…)
“With the recent spike in effective tariffs and the inflationary pressures associated with that, we expect [US] inflation to reach around 4% by the end of this year,” he said. So we’re not expecting policy-rate changes this year.”
Eurozone Inflation Falls Below Target Investors expect the European Central Bank to cut borrowing costs by a quarter point on Thursday to 2%
(…) May’s decline was driven by a drop in services inflation to 3.2% from 4.0% in April, its lowest level since March 2022. That was in part due to the later timing of Easter, but also wages that declined sharply, easing pressure on businesses in the labor-intensive sector. Unemployment, however, equaled a record low of 6.2% in April, data also published Tuesday said. (…)
The consensus expects inflation to rise in the US and fall in the eurozone. Combined with the worsening US fiscal situation, this highly unusual divergence will continue to put upward pressure on US rates across the curve and downward pressure on rates in Europe.
It’s a homebuyer’s market — if you can afford one
There are nearly 500,000 more home sellers than buyers in the U.S. housing market, Redfin estimates.
That’s the widest gap on record — and a big reversal from just a few years ago, when home buyers were desperate to find a place to live, sending prices into the stratosphere.
There are 33.7% more sellers than buyers now. At no other point since Redfin began tracking in 2013 have sellers outnumbered buyers by this large a percentage.
- A year ago, sellers outnumbered buyers by just 6.5%, and two years ago, buyers outnumbered sellers.
- Redfin counted sellers as the number of active listings in a given area and created a model to estimate the number of buyers.
For home sellers “the mortgage rate lock-in effect is easing,” per Redfin. “For most people, it’s not realistic to stay put forever; job changes, return to office mandates and divorce force people to move.” Higher mortgage rates are also becoming normalized. “The idea of taking on a higher mortgage rate also isn’t as shocking as it was when rates first skyrocketed in 2022.”
Historically, when sellers outnumber buyers, prices drop. And in some markets, prices have already started falling.
- Home prices fell in 11 of the top 50 most populous U.S. metro areas in the four weeks ended April 20, per Redfin. That includes Austin; Oakland, California; and Tampa, Fla.
- Redfin believes prices will dip 1% by the end of the year (not exactly a huge sale, to be sure).
Data: Redfin. Chart: Axios Visuals
House prices jumped 54% since the pandemic, double rentflation. It is still much cheaper to rent, even more so with mortgage rates near 7%:
FYI:
“Yesterday, as everybody knows, [was the] first day of hurricane season,” [FEMA leader] Richardson said. “I didn’t realize it was a season.” 
Mr. Richardson does not seem seasoned enough for this job, does he?