US manufacturing remains subdued in May; delivery times lengthening

U.S. manufacturing contracted for the third consecutive month in May, with the ISM manufacturing PMI dropping to 48.5, a six-month low, signaling ongoing challenges from tariffs and supply chain disruptions. Manufacturers cited tariffs as a significant burden, leading to increased input costs and suppliers passing on duties to customers, contradicting the Trump administration's claims. Lengthening delivery times and declining imports further indicate potential shortages and economic strain, exacerbated by uncertainty surrounding trade policies and their impact on business planning.

Analysis

U.S. manufacturing activity contracted for a third consecutive month in May, as evidenced by the Institute for Supply Management (ISM) manufacturing PMI declining to a six-month low of 48.5, undershooting economists' forecast of 49.3. This sustained downturn, where a reading below 50 indicates contraction, is significantly influenced by President Trump's aggressive trade policy, with manufacturers widely reporting that tariffs are disrupting operations and increasing costs, which are subsequently being passed on to customers. This challenges the administration's assertion that trade partners bear the tariff burden. The ISM survey highlighted that supplier delivery times lengthened to their highest level since 2022 (index at 56.1), indicative of supply chain bottlenecks rather than robust demand, while the imports measure plummeted to 39.9, its lowest since early 2009, signaling potential shortages. Specific sectors like transportation equipment, chemical products, and primary metals reported contraction, with transportation equipment suppliers facing financial distress. Conversely, seven industries, including furniture and machinery, still reported growth. The uncertainty is compounded by legal challenges to tariff implementations and concerns over retaliatory measures, such as China's potential export restrictions on rare minerals. Businesses are also contending with subdued factory production, a new orders sub-index at a contractionary 47.6, and continued job shedding in the sector (employment index at 46.8), reflecting broad-based caution and difficulty in forward planning. Concurrently, a separate Commerce Department report showed a 0.4% drop in construction spending in April, with new single-family housing project outlays falling 1.1%, partly attributed to tariff impacts.

Key Decisions for Investors

• Investors should exercise caution regarding exposure to the U.S. manufacturing sector, particularly companies heavily reliant on imported materials or those with limited ability to pass on increased costs, given the persistent PMI contraction, tariff-induced disruptions, and weak forward-looking indicators.
• Monitor upcoming economic data, especially the ISM PMI, supplier delivery times, import/export figures, and producer price indices, for any signs of stabilization or further deterioration in the manufacturing landscape, as well as any definitive shifts in U.S. trade policy.
• Consider overweighting manufacturing companies with diversified supply chains, strong pricing power, and operations in sub-sectors that continue to exhibit growth, while being wary of those in contracting segments like transportation equipment and primary metals which face heightened margin pressure.
• Evaluate the potential for increased input cost inflation and its impact on corporate earnings, as dwindling customer inventories (at a 15-month low) may necessitate restocking at higher prices, further squeezing manufacturers' profitability.