US manufacturing slows as tariff uncertainty drives contraction in May

US manufacturing contracted for the third consecutive month in May, signalling continued uncertainty in the sector as tariffs and trade tensions weighed heavily on businesses.

The Institute for Supply Management (ISM) reported on June 2 that the Manufacturing Purchasing Managers' Index (PMI) fell to a six-month low of 48.5 in May, slightly down from 48.7 in April. A PMI reading below 50 indicates contraction, which represents about 10.2 per cent of the economy.

Despite the drop, the PMI remained above the threshold of 42.3, a level that indicates expansion of the broader economy according to ISM. However, economists were expecting a higher reading, with many forecasting a rise to 49.3. Instead, the survey’s findings underscored a manufacturing sector still navigating a volatile trade environment, compounded by rising input costs, supply chain disruptions, and shifting tariff policies.

The New Orders Index, a key measure of future demand, showed continued contraction for the fourth month in a row. It rose marginally to 47.6 in May, from 47.2 in April, but remained in negative territory.

Similarly, the Backlog of Orders Index improved slightly, registering 47.1—up 3.4 percentage points from April, signalling a slower pace of decline in order backlogs. However, both of these indices suggest a muted demand outlook, as businesses continue to struggle with supply chain delays and rising costs.

Tariff uncertainty exacerbates supply chain bottlenecks

One of the most notable aspects of the ISM report was the sharp decline in the Imports Index, which plummeted to 39.9, a 7.2 percentage point drop from April. This marked the lowest reading for imports in 16 years and highlighted the growing strain on the supply chain as businesses hesitate to commit to new international orders due to unpredictable tariffs and trade policies.

The uneven rollout and frequent changes to tariffs, particularly in the US-China trade relationship, have led to significant uncertainty. As a result, many manufacturers are pulling back from imports, and the forecast for future shipments remains bleak.

The New Export Orders Index also contracted sharply to 40.1, reflecting retaliatory tariffs from other countries on US goods and a slowing global demand for US goods.

Further complicating matters, the Supplier Deliveries Index rose to 56.1 in May, indicating that suppliers are taking longer to deliver goods. This is typically a sign of an economy in growth, but in this context, it suggests bottlenecks and delays caused by supply chain inefficiencies exacerbated by the tariff war.

US port operators have reported declines in cargo volumes, further indicating disruptions in the movement of goods.

Employment in manufacturing also remained sluggish, with the Employment Index inching up slightly to 46.8 in May from 46.5 in April. While the index indicates a slight improvement, it remains firmly in contraction territory, reflecting ongoing layoffs in the sector.

Manufacturers are increasingly turning to layoffs rather than natural attrition to reduce labour costs, with headcount reductions continuing across several industries.

Factories face rising costs, but hope for resolution lingers

The ISM’s Price Index, which measures the cost of materials and inputs for manufacturers, remained elevated at 69.4, down slightly from 69.8 in April. Though prices have slightly moderated, they continue to reflect the strain on businesses as tariffs and supply chain issues push up costs.

Despite the ongoing contraction in the sector, there is cautious optimism among some industry leaders. Susan Spence, Chair of the ISM Manufacturing Business Survey Committee, emphasised that the overall economy remains in expansion, and she expressed hope that tariff uncertainties would soon be resolved.

“We are really hopeful that the tariff uncertainties can come to a conclusion nd that purchasing managers can focus on the normality of what their job should be,” Spence said.