US manufacturing growth slows in September as tariffs weigh on exports

US manufacturing growth slowed in September, with the PMI decreasing to 52.0, primarily due to weaker new orders and a third consecutive monthly decline in exports, heavily impacted by tariffs. Tariffs also increased vendor delivery times and input costs, contributing to a build-up of finished goods inventories amidst cooling demand. This confluence of factors, despite rising employment, poses downside risks for future production, although some firms anticipate domestic market share gains.

Analysis

The U.S. manufacturing sector's growth momentum decelerated in September, as evidenced by the S&P Global Manufacturing PMI falling to 52.0 from 53.0 in August. While still indicating expansion, the slowdown is driven by tangible headwinds, primarily a weakening in new order growth and a third consecutive monthly decline in exports, which are directly impacted by tariffs on trade with Canada and Mexico. A key area of concern is the buildup of finished goods inventories for a second straight month, which, combined with the fastest decline in work backlogs in five months, signals that production is outpacing softening demand. This creates a significant downside risk for future output. Furthermore, the sector faces margin pressure; while tariff-related issues keep input cost inflation historically elevated and lengthen vendor delivery times, output price inflation has eased to its lowest level since January due to competitive pressures. This divergence suggests manufacturers are struggling to pass on rising costs. Despite these challenges, employment rose solidly as firms expanded capacity, and some businesses remain optimistic about gaining domestic market share, though overall uncertainty regarding trade policy persists.

Key Decisions for Investors

• Investors should adopt a more cautious stance on cyclical industrial stocks, as the combination of slowing new orders and a significant build-up in finished goods inventories points to potential headwinds for future production and earnings.
• Closely monitor the profit margins of manufacturing companies, as the divergence between elevated input costs and easing factory gate prices indicates significant margin compression is a key risk for the sector.
• Re-evaluate exposure to companies heavily reliant on exports, particularly to Canada and Mexico, or those with complex cross-border supply chains, as tariffs are creating tangible disruptions and persistent uncertainty.
• Consider screening for domestically-focused manufacturers that may be better insulated from trade disputes and could potentially gain market share, as suggested by the improved optimism among some firms mentioned in the report.