Quarterly Update: The State of U.S. Manufacturing – Q1 2025

The U.S. manufacturing sector continued to show signs of resilience in early 2025, expanding for the second consecutive month despite new headwinds. However, emerging challenges—particularly related to tariffs and demand softening—pose uncertainties for the months ahead.

Manufacturing Sector Overview

According to the latest Manufacturing Institute for Supply Management (ISM) Report On Business, the manufacturing PMI registered at 50.3% in February 2025, reflecting a slight decrease from January’s 50.9%. Despite the decline, a reading above 50% indicates expansion, marking the second straight month of growth following 26 months of contraction.

Key Highlights from the Report:

• New Orders Index fell into contraction at 48.6%, down 6.5 percentage points from January.

• Production Index remained in expansion at 50.7%, though lower by 1.8 percentage points from the previous month.

• Employment Index declined to 47.6%, returning to contraction territory.

• Supplier Deliveries Index increased to 54.5%, indicating slower deliveries.

• Inventories Index slightly improved to 49.9%, though still in contraction.

• Prices Index surged to 62.4%, marking a significant 7.5 percentage point increase.

• Backlog of Orders Index remained in contraction at 46.8%, though slightly improved.

• New Export Orders and Imports grew at 51.4% and 52.6%, respectively, though export order growth slowed.

Industry-Specific Trends

The manufacturing landscape remains uneven across industries. While sectors such as chemical and petroleum products experienced growth, others reported contractions.

• Computer & Electronic Products: The sector contracted, but one respondent noted that tariff impacts on raw material supply were minimal. However, limited U.S. government spending delayed orders.

• Chemical Products: Companies cited concerns about trade uncertainty with Mexico and Canada, leading to customer volatility and potential retaliatory actions.

• Transportation Equipment: While the sector expanded, uncertainty around tariffs caused some customers to delay new orders. Supply chain disruptions also contributed to slower new export orders and supplier deliveries.

Impact of Recent Tariff Changes

Under the International Emergency Economic Powers Act (IEEPA), the U.S. government initially imposed a 10% tariff on all Chinese imports, effective February 4, 2025. This tariff increased to 20% as of March 4, 2025, on top of the existing 25% tariff under Section 301 of the Trade Act (2018), bringing the total tariff burden on most Chinese imports to 45%.

Additionally, on March 4, 2025, the U.S. government imposed a 25% tariff on most goods imported from Canada and Mexico under IEEPA. However, some Canadian energy products, including oil and natural gas, were subjected to a reduced tariff rate of 10%. These measures were introduced to address concerns related to illegal immigration and drug trafficking, particularly fentanyl, entering the United States.

In response, Canada implemented retaliatory tariffs totaling $41.6 billion on various U.S. products, while Mexico has announced plans for countermeasures but has yet to enact them. The implementation of these tariffs has contributed to market volatility and economic uncertainty across North America.

Supply Chain and Cost Pressures

The impact of these tariffs is already being felt across the supply chain.

• Supplier Deliveries: The increase in the Supplier Deliveries Index suggests suppliers are struggling to keep pace with demand, with reports of companies advancing orders to mitigate potential tariff costs.

• Rising Costs: The Prices Index reflects a significant increase in commodity costs, particularly for aluminum, steel, and plastic resin, with electrical components remaining in short supply.

• Inventory Adjustments: The increase in the Customers’ Inventories Index suggests manufacturers are strategically managing stock levels, potentially anticipating further tariff-related disruptions.

Forward-Looking Perspective

While the manufacturing sector remains in expansion, the outlook for the coming months hinges on several key factors:

1. Tariff Policy Clarity – Businesses require more transparency on tariff enforcement and potential exemptions to make informed supply chain and procurement decisions. Continued uncertainty could suppress new orders and investment.

2. Demand Stabilization – With new orders contracting, future growth will depend on whether demand stabilizes in key industries, particularly in electronics and transportation.

3. Cost Management – Rising raw material and component costs will pressure manufacturers to explore alternative sourcing, cost-cutting measures, or pass-through pricing strategies.

4. Global Trade and Supply Chain Adjustments – Manufacturers reliant on imports from China, Mexico, and Canada may need to diversify supply chains to reduce tariff exposure.

5. Policy and Economic Factors – Broader economic conditions, including interest rates, labor market trends, and geopolitical developments, will also shape manufacturing performance in the months ahead.

Conclusion

Despite the continued expansion in the manufacturing sector, ongoing tariff changes, rising input costs, and demand fluctuations present notable challenges. The next few months will be critical as manufacturers adapt to evolving trade policies and economic conditions. Staying informed, agile, and proactive will be key to navigating these uncertainties and maintaining momentum in the industry.