Tariffs weigh on US manufacturing as activity contracts for 7th straight month

WASHINGTON - US factory activity shrank in September for a seventh consecutive month as factories grappled with the fallout from President Donald Trump’s sweeping tariffs.

The Institute for Supply Management (ISM) survey and other private-label data will assume greater importance among investors seeking to assess the health of the economy after the US government shut down at midnight on Sept 30, delaying the publication of key economic data, including the closely watched employment report for September that was due on Oct 3.

Import duties dominated responses in the ISM survey on Oct 1, with some manufacturers of miscellaneous goods complaining “steel tariffs are killing us”.

Paperwork related to tariffs was also causing materials to be held up at borders.

Though some of the uncertainty surrounding trade policy had been resolved as deals were made and the levies came into effect, Mr Trump is not done with tariffs, unveiling more duties recently.

Tariffs have cast a pall over the economy and, combined

with immigration raids,

impeded job growth.

Economists warned the 15th government shutdown since 1981, which will slow air travel, suspend scientific research, withhold pay from US troops and lead to the furlough of 750,000 federal workers at a daily cost of US$400 million (S$515 million), would further muddy the economic outlook.

“Tariffs are a time bomb for the manufacturing industry, which so far has a very long fuse, but eventually it will go off and may well bring the entire economy down with it,” said Mr Christopher Rupkey, chief economist at FWDBONDS.

The ISM said its US manufacturing purchasing managers’ index (PMI) increased to 49.1 in September, from 48.7 in August. It was the seventh straight month that the PMI remained below a reading of 50, indicating contraction in manufacturing, which accounts for 10.1 per cent of the economy.

Economists polled by Reuters had forecast the PMI rising to 49.

Only five industries reported growth, including primary metals and textile mills.

Among the 11 industries that contracted were wood products, machinery, electrical equipment, appliances and components, transportation equipment, as well as computer and electronic products.

Some manufacturers of transportation equipment described business conditions as continuing to be “severely depressed”. They noted that companies are starting to pass on tariffs via surcharges, raising prices by up to 20 per cent.

Others saw no benefit from interest rate cuts and tax reductions from Mr Trump’s One Big Beautiful Bill, which passed in July, because “all capital projects are on hold until there is some level of certainty and customers start to place orders for new equipment again”.

Makers of electrical equipment, appliances and components said “customer orders are depressed for heavy machinery because tariffs are so impactful to high-end capital equipment”.

Similar sentiments were echoed by their counterparts in the computer and electronic products sector, who said “our industry is at a low point right now”.

Mr Trump, who recently announced a raft of duties including a 25 per cent levy on heavy-duty trucks, has defended the tariffs as necessary to protect domestic manufacturing.

The ISM survey’s forward-looking new orders sub-index dropped to 48.9 from 51.4 in August.

This measure has contracted in seven of the last eight months.

Backlog orders remained subdued, as did export orders. Delivery times lengthened further in September, keeping prices paid by factories for materials high.

The survey’s measure of factory employment rose to a still-depressed 45.3 from 43.8 in August.

Some transportation equipment makers said they were “continuing to find ways to reduce overhead, which means letting go of experienced workers”.

Uncertainty hurting labour market

The impact of uncertainty on the labour market was illustrated by the ADP National Employment Report, which showed private payrolls decreased by 32,000 jobs in September, the biggest drop since March 2023, after declining 3,000 in August.

Economists had forecast private employment increasing by 50,000.

The loss of jobs was almost across industries, with only education and health services and information reporting gains.

The ADP report has a poor record predicting the private payrolls in the Labour Department’s employment report. It will, however, take the spotlight in the absence of the monthly jobs report.

“Ordinarily, ADP’s estimate of monthly employment is of secondary importance to macroeconomic trainspotters,” said Mr Bill Adams, chief economist at Comerica Bank.

“It could have outsize influence on the next Fed decision, too, if the shutdown lasts long enough to keep the Fed from seeing the September (official) jobs report before their next decision on Oct 29.”

But the ADP report is not a true picture of the labour market’s health.

The job market has stagnated, with low demand for labour amid weak hiring and the rise of artificial intelligence and a diminishing supply of workers because of immigration raids, creating what Fed chairman Jerome Powell has described as a “curious balance”.

Government data on Sept 30 showed there were 0.98 job openings for every unemployed person in August, compared with 1 in July.

Economists expect the lacklustre labour market will spur the Fed to cut interest rates again in October. REUTERS