U.S. Manufacturing Contracts 1.3% as Tariffs Drive Input Costs Higher

In April, the U.S. manufacturing sector experienced a further contraction, with tariffs on imported goods adding pressure to the supply chain and keeping input costs high for manufacturers. The Institute for Supply Management (ISM) reported that its Manufacturing Purchasing Managers' Index (PMI) fell from 49.0 in March to 48.7, marking the lowest level in five months. A PMI reading below 50 indicates contraction in the manufacturing sector, which accounts for 10.2% of the U.S. economy.

This decline comes during a period when the "Liberation Day" tariff policy, announced by the Trump administration, imposed comprehensive tariffs on imports from most trading partners, including a 145% increase on Chinese goods, sparking a trade war with China. The manufacturing sector is heavily reliant on imported raw materials, and the PMI has now declined for two consecutive months, ending a brief recovery driven by expectations of regulatory easing and interest rate cuts under the Trump administration.

There were no indications in the survey that factories continued to rush imports in March. However, concerns over tariff-induced price increases may have prompted earlier ordering by businesses. The surge in imports during the first quarter put pressure on the domestic Gross Domestic Product (GDP).

The forward-looking new orders index within the ISM survey, which had dropped to 45.2 in March (the lowest reading since May 2023), rebounded to 47.2 in April. Factory production remained sluggish in March, and supplier delivery performance also deteriorated. The supplier deliveries index within the survey rose from 53.5 in March to 55.2. A reading above 50 indicates slower delivery speeds.

Due to the slowdown in deliveries, the prices paid index for inputs by manufacturers rose slightly from 69.4 in March to 69.8, the highest level since June 2022. This indicates a rebound in commodity prices, which had decreased in March. The imports index fell for the first time since December 2022. Factories continued to reduce employment, although the pace of job cuts slowed. The manufacturing employment index rose from 44.7 in March to 46.5.

On April 30, the U.S. Department of Commerce released the first-quarter economic data for 2025, revealing that the U.S. GDP contracted by 0.3% on a year-over-year basis, marking the first negative growth in three years. This poor economic performance has raised alarms about an impending U.S. economic recession.

The first-quarter GDP contraction was primarily due to a significant increase in imports and a decrease in government spending, with net exports dragging down GDP by 4.83 percentage points. The surge in imports partially offset the growth in investment and consumer spending, pulling GDP into negative territory. The year-over-year growth rate of imports in the first quarter was approximately 41%, the largest increase in nearly five years. Since these goods and services were not produced in the U.S., they were subtracted from the GDP.

The core Personal Consumption Expenditures (PCE) price index, adjusted for inflation, rose to 3.5% on a year-over-year basis in the first quarter, exceeding expectations of 3.1% and marking the highest level in a year. This increase reflected growth in both services and goods. However, according to the Federal Reserve's Beige Book released on April 25, consumers may have rushed to purchase vehicles and non-durable goods in anticipation of tariff-induced price increases, contributing to this data rebound.

The economic data for the first quarter of 2025 revealed the deep impact of tariffs on the U.S. economy. The surge in imports, driven by expectations of price increases due to new tariff measures, directly weighed down the GDP. At the consumer level, this manifested as a spike in core personal consumption expenditures, driven by panic buying ahead of anticipated price hikes.

The economic data for the first quarter of 2025 highlighted the significant impact of tariffs on the U.S. economy. The surge in imports, driven by expectations of price increases due to new tariff measures, directly weighed down the GDP. At the consumer level, this manifested as a spike in core personal consumption expenditures, driven by panic buying ahead of anticipated price hikes.

The economic data for the first quarter of 2025 highlighted the significant impact of tariffs on the U.S. economy. The surge in imports, driven by expectations of price increases due to new tariff measures, directly weighed down the GDP. At the consumer level, this manifested as a spike in core personal consumption expenditures, driven by panic buying ahead of anticipated price hikes.