By Lucia Mutikani
WASHINGTON (Reuters) -U.S. manufacturing grew for the first time in more than two years in January, but recovery was likely to be short-lived after President Donald Trump imposed tariffs on goods from Canada, Mexico and China at the weekend, which will potentially further raise raw material prices and snarl supply chains.
The survey from the Institute for Supply Management (ISM) on Monday, which was conducted before the escalation in trade wars, showed raw material inventories at factories were already declining last month, sending prices rising for the fourth straight month.
Economists warned of disruptions to the supply chains, weak economic growth and higher prices for American consumers from the tariffs, which the White House said were to hold the nation’s three largest trade partners “accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country.”
“Tariffs represent a negative supply shock, which hurts production and raises prices, a much smaller scale of what we experienced in the pandemic,” said Kathy Bostjancic, chief economist at Nationwide.
“Another round of tariffs from the U.S. would amplify the deleterious impact on inflation and GDP growth.”
The ISM said its manufacturing PMI increased to 50.9 last month, the highest reading since September 2022, from 49.2 in December. It was the first time since October 2022 that the PMI rose above the 50 mark, indicating growth in the manufacturing sector, which accounts for 10.3% of the economy. Economists polled by Reuters had forecast the PMI rising to 49.8.
Trump on Saturday slapped 25% tariffs on Canadian and Mexican goods that are due to take effect on Tuesday. A 10% tariff was imposed on goods from China. Trump on Monday said he would pause tariffs on Mexican goods.
Manufacturing has been undercut by the Federal Reserve hiking interest rates by 5.25 percentage points in 2022 and 2023 to tame inflation. The U.S. central bank started its policy easing cycle in September. It lowered rates by 100 basis points before pausing in January amid uncertainty about the economic impact of the administration’s policies, including deportations.
U.S. stocks tumbled at open, before recouping some losses. The dollar rose against a basket of currencies. U.S. Treasury yields fell in volatile trade.
SNARLED SUPPLY CHAINS
Manufacturing contracted 0.4% from the fourth quarter of 2023 through the fourth quarter of 2024, Fed data showed.
“Import tariffs will affect the cost and availability of many components that go into the final products sold by manufacturers,” said Christopher Rupkey, chief economist at FWDBONDS.
