US manufacturing stable in February, but storm brewing from tariffs

By Lucia Mutikani

WASHINGTON, March 3 (Reuters) - U.S. manufacturing was steady in February, but a measure of prices at the factory gate jumped to near a three-year high and it was taking longer for materials to be delivered, suggesting that tariffs on imports could soon hamper production.

The Institute for Supply Management (ISM) said on Monday that its manufacturing PMI slipped to 50.3 last month from 50.9 in January, which marked the first expansion since October 2022.

A PMI reading above 50 indicates growth in the manufacturing sector, which accounts for 10.3% of the economy. Economists polled by Reuters had forecast the PMI easing to 50.6. The dip in the PMI mirrored declines in other sentiment measures as President Donald Trump's administration ratchets up tariffs on imported goods.

Domestic manufacturers rely heavily on imported raw materials. Trump in his first month in office has issued a raft of tariff orders.

A 25% tariff on Mexican and Canadian goods comes into effect on Tuesday after being delayed for a month, along with an extra 10% duty on Chinese imports, on top of 10% already imposed. Analysts have warned of a financial fallout for U.S. automakers and other companies manufacturing vehicles in Mexico and Canada to sell in the United States.

Other duties aimed at imported steel, aluminum and motor vehicles will either soon go into effect or are in fast-track development.

Manufacturing only just started recovering after a prolonged downturn triggered by the Federal Reserve's aggressive monetary policy tightening in 2022 and 2023 to tame inflation. Concerns that tariffs will raise prices contributed to the U.S. central bank pausing interest rate cuts in January.

The ISM survey's forward-looking new orders sub-index slumped to 48.6 last month from 55.1 in January. Production at factories nearly braked after rebounding in the prior month.

Its measure of prices paid by manufacturers for inputs surged to 62.4, the highest reading since June 2022. It topped a forecast for 55.8 and was up from 54.9 in January. At face value this suggests goods prices could continue rising after increasing by the most in 11 months in January. Goods prices had largely been muted since last May.

Suppliers' delivery performance slowed considerably. The survey's supplier deliveries index increased to 54.5 from 50.9 in January. A reading above 50 indicates slower deliveries.

A lengthening in suppliers' delivery times is normally associated with a strong economy, which would be a positive contribution to the PMI. But in this case slower supplier deliveries could be indicating bottlenecks in supply chains.

Imports grew further, implying that factories were front-loading materials ahead of tariffs. Factory employment contracted after expanding in January for the first time in eight months. The manufacturing jobs index dropped to 47.6 after rebounding to 50.3 in January.