Dive Brief:

• U.S. manufacturing activity expanded in January for the first time in 26 months on optimism that the Trump administration will spur economic growth, a report showed on Monday, as the White House clouded the economic outlook by using tariffs or the threat of such duties to influence Canada, Mexico and China.
• Demand, production and new export orders improved last month as many companies continued to trim staff, albeit at a slower pace than in December, the Institute for Supply Management said in its Manufacturing PMI report.
• Price increases persisted last month, “indicating that further [manufacturing] growth will put additional pressure on prices,” Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee, said in a statement. “Maintaining a slower rate of price increases as demand returns will be a major challenge for 2025,” he said.

Dive Insight:

Another report released on Monday also showed that U.S. manufacturing last month exited a long period of lackluster performance as business sentiment surged to the highest level in 34 months.

“Business confidence about prospects for the year ahead has leaped to the highest level for nearly three years after one of the largest monthly gains yet recorded by the survey,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement on the company’s Manufacturing PMI.

“Production has already improved after falling throughout much of the last half of 2024,” Williamson said, while warning of price pressures.

“A rise in the rate of increase of both input costs and selling prices could become a concern if this intensification of inflationary pressures is sustained in the coming months,” he said.

Inflation, while exceeding the 2% target of the Federal Reserve, was little changed in December, meeting the expectations of policymakers and affirming their recent decision to hold the benchmark interest rate steady.

The core personal consumption expenditures price index, excluding volatile food and energy prices, rose 0.2% from November and 2.8% over the full year, the Bureau of Economic Analysis said Friday. The gain matched a forecast by Fed Chair Jerome Powell.

The risk of higher inflation grew as President Donald Trump on Saturday imposed 25% tariffs on imports from Canada and 10% duties on goods from Canada.

Trump paused for a month 25% tariffs on Mexico and Canada after discussions on Monday with Canada Prime Minister Justin Trudeau and Mexico President Claudia Sheinbaum, Trudeau and Sheinbaum said in separate statements.

Tariffs on imports from Canada, Mexico and China would push up the PCE, including food and energy, by between 0.72 percentage point and 0.76 percentage point, The Budget Lab at Yale University said Friday.

“That is the equivalent of a loss of purchasing power of about $1,250 on average per household,” The Budget Lab said.

Tariffs imposed on the three countries would “persistently” undercut U.S. output by 0.2%, even without a trade war, The Budget Lab said. “This long-run result does not differ meaningfully between retaliation and no retaliation scenarios.”

The announcement of tariffs did not discourage the Atlanta Fed from upgrading its economic forecast for the first quarter by a full percentage point.

Gross domestic product growth will probably accelerate to a 3.9% annual pace during Q1, the Atlanta Fed forecast on Monday. On Friday, before the announcement of tariffs, the Atlanta Fed predicted a 2.9% expansion.

The economy last quarter expanded at a 2.3% annual rate, fueled largely by robust consumer spending, the Commerce Department said Thursday.

The tariff announcement drew fire from both labor unions and manufacturers.

“A 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally,” National Association of Manufacturers CEO Jay Timmons said Saturday in a statement.

“The ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs, he said. “These businesses — employing millions of American workers — will face significant disruptions.

The United Auto Workers also warned of the harm from import duties.

“We are willing to support the Trump administration’s use of tariffs to stop plant closures and curb the power of corporations that pit U.S. workers against workers in other countries,” the UAW said in a statement. “We do not support using factory workers as pawns in a fight over immigration or drug policy.”

“Trump’s anti-worker policy at home, including dissolving collective bargaining agreements and gutting the National Labor Relations Board, leaves American workers facing worsening wages and working conditions even while the administration takes aggressive tariff action,” the union said.

Trump should restore blue-collar jobs by renegotiating trade deals, according to the UAW.

“The national emergency we face is not about drugs or immigration, but about a working class that has fallen behind for generations while corporate America exploits workers abroad and consumers at home for massive Wall Street paydays,” the union said.