Manufacturing Reports: Expansion Despite Tariffs, War, Labor Pressures

0:00Well I'm glad that we can take a look more closely at some of the data we got in today, the latest manufacturing PMI data from ISM and I'm so glad to have our next guest with us, Susan Spence, chair of ISM Manufacturing PMI at Institute 4 Supply Management. It was such a great job of breaking it all down for us because sometimes headlines tell us one thing and the inside tells us another. What are the takeaways here from the latest data? Good afternoon to come. Thanks for having me. Appreciate it. Well we do have our third month in expansion for the overall PMI and our third month for new orders all good. But what we do notice this month, besides the comments about tariffs which continue in war, are expanding subindexes, new orders, new export orders and backlog. We have new orders and backlog that the growth is still there but it has slowed down by about two and a half points

1:00each. So that's a bit worrisome. Production is up for the fifth month in expansion but as we know production follows about a month or two behind whatever happens with new orders and backlogs. So I'm a bit optimistic but a bit less than last month because we're headed back toward the 50 level. Employment is stubbornly flat that is no surprise. We still have a sentiment from our panelists that say we're not hiring and we're not firing. We're just going to hold because we still have some concerns about tariffs. We do have a new worry about war and the big news this month for the second time we have a big price hike. So we have gone up 19.2 percentage points in two months. That's a very big hike the biggest in years. And so inflation is hitting the sectors and it's hitting 17 out of 18 of them.

2:01So while the war concerns may be shorter lived it is on top of the tariff concerns that are still there despite the scotus rolling here. So we're glad we're in expansion but it's slowing down and that does not make us happy. Right and the Fed of course takes every little piece of news and looks at this. I mean the first part of the story that you noted so clearly was the rising prices that became evident right when 78.3 from the prior 70.5. What kind of prices are we talking about and do we see those as being sticky or sort of a one off? You know this month there were 24 commodities with an increase in price and you can see the detail. Some of them have been there for a long time aluminum steel. The surprise were the things that showed up for the first time in a while. Corn was one. Some of the different types of fuels not a surprise. What was interesting to me is we had no commodities that were lower in price.

3:03So 17 out of 18 sectors with expanded prices and then no commodities listed as down. The short commodities are a lot of them that go into data center and hyperscaler builds, right? Memory, electrical, electronic parts, things like that. So at Rare Earth of course short. So we have increasing prices. A bit of a slowdown in growth and flat employment. And as you noted the Fed, high prices and flat to go in lower employment is the opposite of what they want to see. So next month we'll have our semi-annual forecast. So in December I'll remind the audience these manufacturers thought they'd have about a 4% growth in revenue. So there was an optimism despite the year that we have had. And we will see depending on I think what happens in the middle least, but also if there's new news on tariffs. The new orders part slowing the backlog.

4:10That's problematic. Can that really be start to hit durable goods and all kinds of things in GDP? How bad was that? You know the manufacturing sector in contraction, just four or five months ago was 80%. It's much, much better now. Strong contraction sitting at about four, but you're right. If the new orders head back toward the 50 level and then below, backlogs going to follow production is going to follow. Certainly no hiring is going to happen of any consequence. And depending on the impact from our prolonged middle least conflict on top of all that, it could very well turn the sectors back to contraction. Again, it wasn't that long ago that 80% of manufacturing sectors were in the contraction area below a 50. So we don't want to see that again.

5:10We need stability. Any way to sort of give us a glimpse into the rest of the year. I mean, is it clear that something, I don't know what, I mean, I know you said about employment being somewhat flat, inflation a little bit higher, right, and prices paid a little higher. I think there was something with wages that was a little higher, but I can't find it. But between now and the end of the year, is there any sort of takeaway that the Fed will definitely be watching or theme? I think they watch a lot of things. I think they watch this report carefully. I don't expect employment to break out anytime soon. And that is based not just on numbers, but what panelists is saying for sentiment. Now, for sure, sentiment on hiring versus firing was for every person hiring. There were six that weren't. It's now one to the one and a half range. It's much improved, but my belief is because of the uncertainty we still have made worse

6:12by the Middle East conflict, companies are holding back on hiring, maybe investing in capital. And they still have, you know, the threat in the background of replacement tariffs. Let's call it the ones that would replace the IEPA. So I hope the semi forecast next month from the panelists shows that they still remain optimistic. I would certainly feel better about it if our demand indicators continue to grow versus slow down in their growth. Understood. What are you waiting on next? You know, what's your next piece of information that you're going to sink your teeth into? I know we'll have a jobs report on good Friday. We'll be closed, but people will look at that. You know, what what reports are you watching for in the near term? I know that for example, also mortgages one from 643 up to 657. I think they've come down a little bit. So what reports are you watching for in the next week or so? What's important? You know, one thing I look at every month is the consumer sentiment that comes out. The University of Michigan sentiment,

7:16the conference board sentiment. Those are important. Watch the jobless claims, the continuous claims, which were, believe they were flat from last month. I'm mostly going to be looking for, and I'm not sure if there's anything coming on these new 150-day tariffs that are the administration have talked about that they have started the probes that they need to do to prove a certain country might be treating the US unfairly, therefore they can, you know, have the 150-day tariffs for a max of 15. I'm also watching for news items like the EU approving the 15% tariff deal and my understanding is that's now back with the US counterpart and that there's additional conditions on that from the EU not wanted to be treated badly to paraphrase. My feeling is if more, if there's going to be tariff deals and more of them get settled that are maybe below the 20% level then, and if there's a belief that they are not going to get turned over

8:23and changed with the next leverage point from the administration that maybe the manufacturers are going to feel better, maybe the customer orders will come back a little more. At this point, I'd look for no more erosion. That's certain we can expect a big growth trajectory, but in your trust. Yeah, in Joel's War Weaker, we did see that. Wages were in the upswing and that's where I saw that. Susan Spence Institute for Supply Management. Susan, great to chat with you. Really appreciate it. Thank you for coming on in these big days.