The US manufacturing industry hits the "emergency brake" and collides with the "high pressure line" of inflation: a cliff-like drop in orders sounds the economic alarm.

Due to a contraction in orders and employment, factory activity in the United States almost came to a standstill last month. At the same time, the intensifying impact of tariff concerns caused the materials price index to soar to its highest level since June 2022. According to data released on Monday, the Institute for Supply Management (ISM) manufacturing index fell 0.6 points to 50.3 in February. An index above 50 indicates that manufacturing is in a growth phase. The organization's price index rose 7.5 points to 62.4. Against the backdrop of declining orders, rising input costs pose a huge challenge for manufacturers. This suggests that demand faces further contraction risks as businesses weigh the impact of the Trump administration's tariff policies. If sales continue to be weak, manufacturers may struggle to pass on higher costs to customers. After experiencing the first contraction since September 2023, the supplier deliveries index has shown growth for five consecutive months. This indicates that inflationary pressures in the production process are heating up again, but it is unclear to what extent manufacturers can pass on these higher costs. Following the release of the survey results, the S&P 500 index, US bond yields, and the US dollar all fell. Although the supplier delivery index achieved its largest monthly increase since September 2021, pushing overall growth in the ISM manufacturing index, the ISM noted that the data for February reflected suppliers struggling to meet demands accelerated ahead of tariff hikes. Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, stated in a release: "As our survey respondents' companies experience the first operational impacts of the new government tariff policies, demand has eased, production has stabilized, and layoffs persist. Price increases accelerated due to tariff impacts, resulting in backlogs of new orders, delivery interruptions from suppliers, and disruption of manufacturers' inventories." Steel and aluminum tariffs cause inflation crisis Regarding rising prices, Fiore said in a telephone call with reporters that steel and aluminum prices immediately increased after Trump announced tariffs. Some suppliers did not accept as many new orders due to disagreements over who would pay the additional costs. A government report released last Friday showed that the core personal consumption expenditure price index, which the Federal Reserve watches closely, rose slowly in January, while consumer spending recorded the largest drop in nearly four years. Stuart Paul, an economist at Bloomberg Economics, stated: "The retracement of new orders and production in the February report is not as important as input prices soaring and weak employment. Comments in the report mainly focus on price pressures and tariff uncertainty. We believe manufacturers will try to pass on higher input prices to customers." ISM survey data shows that factory managers' optimism has weakened since Donald Trump's election as president, with increased uncertainty around tariffs and geopolitical risks. The long-promised 25% tariffs on Mexico and Canada (the US's two largest trading partners) will take effect on Tuesday. Another set of data released on Monday showed that construction spending fell by 0.2% in January, which is expected to put pressure on the economy. Following these data releases, the Atlanta Federal Reserve Bank's GDPNow forecast showed that the first-quarter real GDP growth rate is expected to decline by 2.8% at an annual rate, reflecting a significant drop in residential investment. The previous GDPNow forecast was a decline of 1.5%. The ISM report for February showed growth in 10 manufacturing industries, including petroleum and coal, primary metals, and wood products. Five industries experienced contraction, with furniture and textile mills performing the worst. The ISM new orders index fell by 6.5 points to 48.6, marking the first contraction since October 2024. This is the largest monthly decline since April 2020. The US February ISM Manufacturing Output Index surged to its highest level since March and then fell to 50.7. This, in turn, restrained manufacturers' hiring. The factory employment index dropped 2.7 points to 47.6. The index shows that employment rates have shrunk for 8 out of the past 9 months. Here are ISM industry comments: Chemical Products: Tariffs on products from Mexico and Canada have brought uncertainty and volatility to the industry's customers, increasing the impact of retaliatory measures from these countries. Transportation Equipment: Customers have halted new orders due to tariff uncertainties. The government has not provided clear guidance on how to implement these measures, making it difficult to predict how they will affect business. Computer and Electronic Products: The impact of tariffs on the overall manufacturing industry and raw material supply is minimal. Budget constraints on key agencies such as the Food and Drug Administration, the Environmental Protection Agency, and the National Institutes of Health are delaying some orders. Food, Beverage, and Tobacco Products: Inflation and price pressures continue to exacerbate uncertainty about the industry's outlook for 2025. The industry has seen prices affect sales volumes, with consumers buying less and seeking alternatives. Machinery: The upcoming tariffs have led to price increases for our products. Many suppliers have significantly raised prices. Most suppliers have noticed rising labor costs. Suppliers report excess capacity. Inflationary pressures are concerning. Fabricated Metals: Business remains slow, but signs of improved demand are expected to emerge in six to nine months. Electrical Equipment, Appliances, and Components: New orders continue to show strong momentum following a rebound in December. Although sales are strong at present, the industry is cautious about spending due to tariff uncertainties. Plastics and Rubber Products: Internal analysis is ongoing regarding the impact of tariffs, but specific results are not available yet. Overall business conditions remain lukewarm; the outlook for durable goods has become more pessimistic with increased domestic automobile inventories. Primary Metals: Customer numbers seem to be better than in 2024. However, due to market uncertainty caused by proposed steel/aluminum import tariffs, customers are still very unwilling to commit to long-term supply. Meanwhile, as businesses increased orders from foreign suppliers before the threatened tariffs took effect, the import index rose to 52.6, its highest level since March 2024.