Dive Brief:

• U.S. manufacturers cut output and employment in March in the face of weaker demand, slower deliveries and tariff-induced cost pressures, the Institute for Supply Management said Tuesday.
• The institute’s manufacturing index last month fell 1.3 points to 49, lower than expected and below the level of 50 that signals contraction. “Companies are revising production plans downward in the face of economic headwinds,” Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee, said in a statement.
• “Destaffing continued as panelists’ companies responded to demand confusion,” Fiore said. “Prices growth accelerated due to tariffs, causing new order placement backlogs, supplier delivery slowdowns and manufacturing inventory growth.”

Dive Insight:

A similar report released Tuesday also highlighted inflationary pressure from import duties as the Trump administration prepared to announce a new barrage of tariffs on Wednesday.

“Tariffs were the most cited cause of factory input costs rising in March, and at a rate not seen since mid-2022 during the pandemic-related supply shock,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement on the company’s Manufacturing PMI.

“A key concern among manufacturers is the degree to which heightened uncertainty resulting from government policy changes, notably in relation to tariffs, causes customers to cancel or delay spending,” he said. “Supply chains are also suffering to a degree not seen since October 2022 as delivery delays become more widespread.”

Both surveys highlighted a turnabout in the outlook among manufacturers, from optimism in January to caution in March. Factory workers are apparently bearing some of the brunt from the change in mood.

“Panelist companies continued to release workers,” Fiore said, adding that the companies “continued to cite ‘attriting down’ as the best process as opposed to layoffs.”

Panelists surveyed by ISM flagged declines in new orders — including new export orders — a quickening decline in order backlogs and the persistence of customer inventories at a “too low” level, ISM said.

“Newly implemented tariffs are significantly impacting gross profits,” the ISM quoted an unidentified survey panelist as saying.

“Canada’s new tariffs on U.S. goods are significantly impacting orders from that country,” the panelist said, adding “quotes and sales are lower from Europe due to the threat of retaliatory tariffs.”

Federal Reserve Bank of Richmond President Tom Barkin said Tuesday that new tariffs may push up unemployment as well as inflation.

Companies facing reduced profit margins because of tariffs may seek to increase efficiency by laying off workers, he said.

“If you're a company that can't raise prices, then your margin goes down,” Barkin said. “You're going to start working on operational efficiencies, and that means head count.”

At the same time, producers of goods and services, having weathered the pandemic supply shock by raising prices, will be inclined to do so again, he said at the New York Council on Foreign Relations. Yet they will confront consumers reluctant to pay higher prices after enduring the bite from inflation early this decade.

“It's sort of a cage match between an emboldened supplier who really believes that they've got to pass on these tariffs and a frustrated consumer who really believes that ‘I'm not paying those high prices anymore,’” Barkin said.

“Where that lands is going to be very interesting to see,” Barkin said in a moderated discussion in New York at the Council on Foreign Relations. “Obviously some amount of that will pass through into prices and so that will be inflationary.”