America’s manufacturing engine is sputtering again—tariffs, employment cuts, and Fed policy are colliding in a dangerous feedback loop.
KEY TAKEAWAYS
Manufacturing now makes up only 10% of GDP but has an outsized impact on economic health
ISM Manufacturing Index fell to 48.7–its eighth straight month below 50
Tariffs are directly raising input costs and suppressing new orders and exports
Employment contraction in manufacturing is deepening, with firms cutting headcount
This isn’t a recession call–but it’s a clear yellow light for the U.S. economy
MY HOT TAKES
Tariffs may be doing more harm than help–they’re a tax on production, not protection, according to manufacturing execs
Manufacturing slowdowns ripple through the entire service economy faster than people think
Fed rate cuts usually follow this pattern, and the clock is ticking
The anecdotes in the ISM report are louder than the numbers themselves
We’re not crashing, but we continue to coast on warning lights
You can quote me: “You don’t just raise a rate and get a welder.”
Manufactured? When I turned 14, my mother drove me to the local high school so that I could get what, at the time, was called “working papers.” I was preparing to live with my aunt and uncle for the summer and work in my uncle’s factory. I would earn $3.18 an hour, which was the minimum wage at the time. I can tell you that I earned every cent of it and my only perk was that I was able to sit in my uncle’s office and eat lunch with him, my aunt, and my cousin, who would ultimately inherit the family business. I would get on line with all the other workers and punch in at 9:00 AM and punch out at 5:00 PM. Between those hours I would haul big cartons onto a freight elevator, check them in, mark them, then deliver them to a large storeroom where I would later retrieve them and unbox their contents. I would not stop until I heard the lunch bell ring at 12:00. At 12:30 it was back to the dock, and the 4:30 bell would remind me to tidy up and get ready to call it a day a half hour later. I did that for several summers and managed to even save some money. Of course, it helped that I didn’t have to worry about room and board. It also didn’t hurt that my aunt was an excellent cook and that I had what would be considered gourmet meals every day.
Have you heard that the US is a service-based economy? If you travel around the country enough, you are sure to have driven past a gentrified town dotted with smokeless smokestacks, which now tower over once-bustling factories that now house food halls. It is true that manufacturing these days represents only about 10% of US GDP. Check out this chart and keep reading.
This chart shows manufacturing contribution to GDP over the past 20 years. You can see how it started low and how it has gotten lower yet in a clearly declining trend. For perspective it is important to note that this is a percentage, so even though it is declining, it doesn’t mean that manufacturing is necessarily going away. It could also mean that the services economy grew more rapidly over that timeframe. That said, it is clear that manufacturing is contributing less overall to US economic growth. So, then, why do so many politicians obsess over manufacturing? Why do I 🙋talk about it so often?
What are your thoughts about recession? You don’t have to answer that question, it was rhetorical. Of course, you don’t like recessions, because they are portfolio killers! The National Bureau of Economic Research (NBER) is an organization that is responsible for labeling recessions in the US. Did you know that a principal input into NBER’s economic health model is Industrial Production? Yep, it includes manufacturing (75%), mining (15%), and utilities (10%). So, it is fair to say that manufacturing has a pretty direct link to economic health. You can even say that it punches above its weight class in impact considering that it makes up only 10% of GDP. Industrial production is actually very sensitive to changes in business cycles making a good leading indicator of economic health. Now, remember, we are talking math here, but I am sure that you can imagine the real stories behind it–layoffs, hardship, etc.
Did you know that there is a leading indicator of Industrial Production, which we have now–hopefully–established as a leading indicator of recession? The Institute for Supply Chain Management (ISM) publishes its ISM Manufacturing series monthly. The ISM Manufacturing Index is a Purchasing Managers’ Index (PMI) that summarizes monthly survey responses from manufacturing executives across key industries. It is a diffusion index, meaning it measures the breadth of change, like how many firms report increases versus decreases in activity across areas like new orders, production, employment, supplier deliveries, and inventories. I like to refer to PMIs as the corporate equivalent to consumer confidence. My long-time followers know that one of my favorite lines is “confident companies employ!” It goes further. Did you know that there is research that shows a 0.8 correlation between ISM Manufacturing PMI and manufacturing output. For you non-math types, that is a strong correlation. SO, looking closely at manufacturing PMI is a good idea if one wants to get some insight into broader economic performance.
It just so happens, that we got that very number yesterday, and it wasn’t pretty. It came in below expectations at 48.7 and below the prior month’s print of 49.1. A reading below 50 represents a contraction, and this past one represents the 8th consecutive print below 50. Let’s dig in a bit, because now you know just how important it is. Check out my favorite Bloomberg ECAN chart of ISM and follow me to the close.
I read the report, so you don’t have to. What immediately leaps out in this report is how clearly tariffs are showing up in the plumbing. You can feel it right in the actual comments published in the report. “Tariffs continue to be a large impact to our business. The products we import are not readily manufactured in the US, so attempts to reshore have been unsuccessful.” That’s not an obscure economic theory, that’s a production manager staring at a bill of materials that won’t balance. When prices are increasing and production is contracting, margins get squeezed from both sides. It starts with overtime disappearing. Then it becomes a hiring freeze. Then it becomes “managing head count is still the norm,” according to the report’s committee chair. One respondent put it even plainer: “[We are] continuing to find ways to reduce overhead, which means letting go of experienced workers.” This is exactly how a manufacturing slowdown leaks into services. Fewer shifts for shippers and warehouses, fewer PO’s for maintenance contractors, fewer miles for truckers, fewer orders for parts distributors, fewer temp placements on the shop floor and in back offices.
Prices are the other data point. When the Prices Index stays in expansion while volumes soften, companies try to pass through what they can and eat the rest. The comment “Steel tariffs are killing us” is dramatic, but it’s not hyperbole inside a business that buys it by the ton and sells finished assemblies by the penny. Procurement can claw a little back via supplier negotiations and lead-time games, but if input costs are rising due to tariffs and the demand side is wobbling, the only flexible lever is payroll. That’s why the Employment Index’s ninth straight month of contraction matters so much. It’s not just a line on a dashboard; it’s a signal that the belt-tightening is past the easy stuff. Once you’re laying off experienced workers–people you fought to recruit in 2021–2022–you are making bets about 2026 capacity you can’t quickly undo. You may remember that recruiting workers was a real challenge in the late-pandemic; the labor market was tight with very little slack, which likely added to the inflation through rising labor costs.
New orders deserve a closer look, because everyone wants to call a bottom. Yes, the index improved a touch. And yes, customers’ inventories are still “too low,” which usually helps future production. The report from ISM tells a lot: “For every positive comment about new orders, there were 1.7 comments expressing concern about near-term demand, driven primarily by tariff costs and uncertainty.” That ratio is the heartbeat. It says the pipeline is unstable, the quote win-rates are deteriorating, and sales teams are being asked to hold prices that don’t pencil without volume that isn’t there. It shows up in backlogs, which are still contracting, even if a little less so. A backlog that shrinks while supplier deliveries slow is not a timing quirk, it’s caution. People are preserving cash, stretching reorder points, and telling suppliers “not yet.”
Exports are another pressure point. According to ISM, “ongoing trade friction is still resulting in diminished demand.” A transportation-equipment executive says it plainly: “The commercial vehicle market remains depressed… US trade policy and reciprocal actions by China… have once again caused a lot of stress in supply lines.” Agriculture and machinery echo it from another angle: when export markets seize up, farmer income drops, and “the likelihood of farmers investing in new equipment” drops with it. These are classic second-order effects, which, by the way, we experienced in the first tariff war with China in 2019.
I want to stay with employment because the human side is being buried under the headline. Manufacturing jobs aren’t the majority of American jobs anymore, but they pay well, they cluster, and they support whole local service ecosystems. When a plant cuts a shift, the diner on the corner feels it within a week. The bank branch notices it in overdrafts. The HVAC contractor has a quiet month. And because these are skilled roles, cycles are sticky. You don’t just raise a rate and get a welder. The ISM report is blunt: for every hiring comment, there were 3.4 comments on reducing head count. That is not “soft landing” language, that is triage.
Some will argue prices easing a bit this month takes pressure off. It helps, but the report’s own nuance matters: increases continue, “driven by steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods.” If your inputs are being jacked up by tariffs, your capex is impacted by tariffs too. One respondent nails the trap: “Challenges with tariffs on production equipment necessary for internal production makes it difficult to justify expansion of capacity.” That is the paradox of tariffs. You’re trying to tilt the field toward domestic production while making the machines to do that production more expensive. The result is hesitation to invest.
Where does the Fed fit? Historically, sustained sub-50 manufacturing PMIs have preceded easing cycles. It’s not a magic number, it’s just a cluster of signals like new orders rolling over, employment contracting, output slipping, backlogs thinning, and stubborn prices. Those are the conditions that, over a few months, start to show up in industrial production and payroll data. It's the stuff the Fed and NBER actually weigh heavily. If these readings persist, the odds favor more accommodation, not because policy “fixes” tariffs, but because policy can cushion their macro aftershock.
All of this feels personal to me because I watched a version of this movie before. My uncle’s factory was not huge. It was a focused shop that did one thing well for a set of loyal customers. By the late ’80s, his accounts were getting phone calls about “new options” out of China. Cheaper, faster, good enough. It didn’t happen all at once. First, a couple of SKUs shifted. Then a seasonal order went overseas. Then a customer “tested” a second source. He fought it, but he was playing a game on a tilted floor. My cousin, who at the time, ran the business, eventually shut it down. Not because he forgot how to compete, but because the goalposts had been moved to another continent.
Leveling the playing field certainly makes sense to me, having cut my teeth on the factory floor, but tariffs are a blunt instrument, and the anecdotes in this ISM report are quite telling. “Business continues to remain difficult,” says one chemicals executive. “Money is sitting tighter,” says another. “Wonder has turned to concern,” says another. To be clear, it’s not a flashing red light for the whole economy–services are still doing the heavy lifting–but it is a steady yellow. It says slow down, eyes up, hands at ten and two. It says watch new orders over the next quarter, watch the employment comments, watch backlogs, watch prices. It says don’t mistake an index wobble for a cyclical bottom until the anecdotes change tone.
So, I’ll leave you where I started, in that office with the door cracked to the floor and the clock that ran five minutes fast, so no one missed the bell, watching my uncle sign piles of checks while he cracked silly jokes and asked me about school–always telling me to eat more. This ISM isn’t screaming “recession,” but it is telling you that a critical economic artery is clogged, that policy is adding blockage where we need flow, and that we need to watch things carefully. Yellow light, not red. Respect it! And, if history is any guide, remember that when manufacturing breathes this shallow for this long, the Fed usually reaches for the oxygen tank–hopefully those inflation-fighting-zealot FOMC members are paying attention.
YESTERDAY’S MARKETS
A big AI deal for Amazon along with continued solid earnings helped propel the Nasdaq and S&P higher yesterday–the Industrials gave up ground. Post market comments from nervous, soothsaying bankers put pressure on markets overnight. 10-year yields gained yesterday and the dollar climbed.
NEXT UP
The government shutdown ties its last record today leaving us without any economic data on the calendar.
Important earnings today: ADM, AMD, Apollo Global, Uber, Yum! Brands, MARA Holdings, Norwegian Cruise Lines, Pfizer, Exelon, Martin Marietta Materials, Global Payments, Marriott International, Zoetis, Wingstop, AIG, Corteva, Rivian, Live Nation, Lumentum, Pinterest, Match Group, Super Micro Computer, Kratos, Skyworks, and Amgen.