MNI INTERVIEW: Trump Tariffs Risk Killing Factory Recovery-ISM
MNI (WASHINGTON) - U.S. manufacturing in January expanded for the first time in 26 months and will likely continue growing slowly in the coming months, but President Donald Trump's tariffs are a major uncertainty that heighten the risk of a contraction, ISM survey chair Timothy Fiore told MNI Monday.
The ISM manufacturing composite in January increased 1.7pp to 50.9, above market expectations. The PMI reached expansionary territory for the first time since October 2022 and the composition of the report was strong as the new orders, production, and employment components all increased.
"Demand appears to be coming back. Clearly, activity is moving in the right direction," Fiore said in an interview after Trump announced a one-month pause of 25% tariffs on Mexican imports after an agreement on border troops. Fiore said he expects the tariffs on Mexico and Canada would not be in place for a long time, while those on China may remain in place for some time, but he said it was too soon to get a good handle on how the disputes will play out.
"The reality is that tariffs have the potential of knocking everything off track. There's no doubt about that," said Fiore. He noted an eight point decline in the ISM PMI from mid-2018 to mid-2019 after Trump implemented tariffs in his first administration.
DOWNSIDE RISKS
Fiore suggested his baseline outlook sees one or two 25 basis point cuts from the Federal Reserve sometime later this year, but there's also a risk of the Fed's needing to lower rates more quickly.
"These tariffs are roughly three times worse than the last ones, so on that basis, they're gonna have a much more accelerated effect. It could very well be that tariffs cause the Federal Reserve to cut rates," he said. "We could slow the economy down so bad that he's got to cut the rates to keep it from collapsing."
In the months ahead, Fiore expects "February will be better" and growth is going to be "slow" in coming months. "I'm not expecting a faster grow out and I'm not sure what would drive a faster grow out."
The January ISM report showed the employment subindex increasing 4.9pp to 50.3. Survey panelists "feel that they're right-sized," Fiore said. "We're probably at a new baseline, and now we need to look for growth as the production number grows too."
The prices subindex also showed quicker price growth, increasing 2.4pp to 54.9, primarily due to elevated natural gas prices. "That kind of fits well with the fact that the Federal Reserve held on cutting rates last week," Fiore said. (See: MNI INTERVIEW: Fed Rates Likely On Hold Through 2025-Croushore)
"You got prices going up and demand is just coming back. Those two are going to work against each other," Fiore said. "That is going to give (Fed Chair Jerome) Powell a hard time for further rate reductions."