US Manufacturing Slips Into Contraction As Tariff-Driven Costs Hit Near 3-Year High

The brief revival in U.S. factory activity vanished in March as input prices shot up at the fastest pace since mid-2022, raising red flags about eroding profit margins, cost pass-through risks and strained supply chains as the U.S. economy braces for the impact of “reciprocal trade tariffs.”

On Tuesday, the Institute for Supply Management revealed its closely watched Manufacturing Purchasing Managers’ Index dropped back into contraction territory after two months of marginal expansions, slipping from 50.3% in February to 49% in March.

Demand Drops, Costs Spike

The ISM’s March data showed a troubling divergence, further bolstering the risk of entering a stagflation environment: while demand indicators weakened, input costs surged.

The Prices Index rose sharply to 69.4% from 62.4% in February, its highest level since June 2022. The acceleration was primarily attributed to increased tariffs, which companies are rushing to circumvent.

“Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery slowdowns and manufacturing inventory growth,” said Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee.

Meanwhile, new orders—a proxy for demand—sank to 45.2% from 48.6%, the lowest reading since August 2024.

The employment index dropped to 44.7%, the weakest since September 2024, and production fell to 48.3% from 50.7%.

Why Are Input Prices Rising This Fast?

The spike in input costs is largely driven by firms stockpiling inventories to avoid future tariffs. All four components of ISM’s inputs measure—prices, supplier deliveries, inventories and imports—registered expansion in March, a rare occurrence when demand is simultaneously falling.

Fiore said inventories are rising not from optimism, but from a “temporary move to avoid tariffs” and are expected to decline once the trade environment stabilizes.

The Backlog of Orders Index fell to 44.5% from 46.8%, indicating companies are burning through old orders without replenishment. Meanwhile, the Imports Index barely stayed in growth territory at 50.1%, down from 52.6%, reflecting reduced sourcing activity.

Are Businesses Losing Confidence?

The contraction in ISM’s March data contrasts with the slightly more upbeat tone of S&P Global’s manufacturing PMI, which was revised up to 50.2 from 49.8, signaling tepid expansion. Yet, beneath the surface, the cracks are also evident in that survey.

“The strong start to the year for U.S. manufacturers has faltered in March,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. He said the early-year boost from improved optimism and tariff-front-running is fading, as production and order books deteriorate.

Williamson noted that “tariffs were the most cited cause of factory input costs rising in March,” and the current pace of cost inflation is the highest since August 2022.

He flagged a sharp deterioration in supply chains, with delivery delays now the worst since October 2022.

“A key concern among manufacturers is the degree to which heightened uncertainty resulting from government policy
changes, notably in relation to tariffs, causes customers to cancel or delay spending, and the extent to which costs are rising and supply chains deteriorating in this environment,” he said.

“Data in the coming months will provide important insights into how the inflationary aspects of policies such as tariffs balance out against any benefits to U.S. producers,” he added.

Market Reactions

The S&P 500 index – as tracked by the SPDR S&P 500 ETF Trust SPY flipped to losses on Tuesday, down 0.8% by 10:20 a.m. ET.

The tech-focused Nasdaq 100 – tracked by the Invesco QQQ Trust, Series 1 QQQ – slipped 0.5%, while the Dow Jones Industrial Average lost 1%, weighed down by declines in blue-chip names across healthcare, financials and industrials.

Among mega-cap stocks, Johnson & Johnson JNJ plunged more than 4% after a judge blocked its proposed $10 billion settlement tied to talc-related lawsuits, prompting the company to unwind $7 billion in previously set aside reserves.

In fixed income markets, bond yields fell as demand for Treasuries picked up, reflecting a risk-off shift. The yield on the 10-year Treasury dropped 8 basis points to 4.1%.

Gold prices inched 0.2% higher, further extending record highs. Bitcoin BTC/USD was up by 0.5%.

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