U.S. Manufacturing Contracts for Third Straight Month as Tariff Uncertainty Weighs on Output

ISM Manufacturing Index Slips to 48.5 in May, Raising Concerns of Broader Industrial Weakness

The U.S. manufacturing sector continued to shrink for a third consecutive month in May 2025, according to the latest data released by the Institute for Supply Management (ISM). The Manufacturing Purchasing Managers’ Index (PMI) fell to 48.5, down from 48.7 in April and falling short of economists’ expectations of 49.5.

The May reading marks the sharpest pace of contraction since November 2024, reinforcing concerns that mounting trade tensions, cost pressures, and uncertain demand are beginning to take a more pronounced toll on the industrial economy.

A PMI reading below 50 indicates contraction in manufacturing activity, and this third consecutive sub-50 reading reflects a deepening of the sector’s malaise. Economists and market watchers are now recalibrating expectations for U.S. GDP growth in the second half of 2025, particularly in light of weaker forward-looking indicators such as new orders and export sales.

New Orders, Output, and Employment All Weaken

According to the ISM report, key subcomponents of the index weakened further in May. Output, new orders, and employment all declined, though at a slightly slower pace than in April. The New Export Orders Index saw a more substantial drop, reflecting deteriorating global demand and trade friction-induced uncertainty.

Export-oriented manufacturers are bearing the brunt of escalating trade barriers reintroduced under President Trump’s renewed protectionist stance. A new wave of tariffs on Chinese, European, and Mexican goods, and retaliatory measures from trade partners, have increased transaction costs, distorted demand cycles, and reduced visibility for corporate investment.

“We’ve seen customers reduce orders or delay shipments in anticipation of additional tariffs or compliance issues,” said one respondent in the machinery sector quoted in the ISM report. “Planning beyond the next quarter is becoming increasingly difficult.”

Inventory Dynamics Shift Amid Tariff Risk

One of the more significant movements in the May report was in the Inventories Index, which slipped into contraction territory. This marked a reversal from April’s expansion, which had been largely attributed to pull-forward buying as firms sought to build buffer stocks ahead of expected tariff hikes.

The unwind of that inventory surge is now weighing on production schedules and supplier demand. At the same time, the Backlog of Orders Index also declined further, suggesting that previously accumulated demand is not being replenished at a healthy rate.

While tariff-driven inflationary pressure has eased slightly—particularly on raw materials such as aluminum and steel—the report notes that price growth remains elevated and erratic, disrupting cost planning for manufacturers.

Supplier Bottlenecks Persist

The Supplier Deliveries Index remained in expansion mode, indicating ongoing delays in the delivery of inputs and components. Port congestion and customs delays—exacerbated by trade policy volatility and reduced staffing at key federal processing agencies—continue to create bottlenecks.

“Bottlenecks are no longer just about physical delays—they’re now about regulatory uncertainty at the border,” noted an executive in the electronics sector. “Even routine shipments are taking longer due to reclassification, inspections, and administrative backlogs.”

Persistent delivery delays can obscure demand signals, inflate lead times, and complicate inventory management, creating cascading effects across the supply chain.

Political Economy Complications

The manufacturing PMI’s trajectory now adds another layer of complexity to the broader U.S. economic narrative. The Biden-to-Trump policy reversal has reintroduced protectionist trade measures, reduced federal hiring, and constrained immigration—all of which affect labor supply, supply chain stability, and consumer confidence.

With U.S. GDP already projected to grow at just 1.6% in 2025—down from 3.3% in 2024—the industrial sector’s weakness could drag overall growth even lower unless offset by robust service sector activity and resilient household spending.

The ISM data aligns with other soft indicators: regional Federal Reserve manufacturing surveys have also shown sluggish activity, while industrial production data from the Fed is flatlining. Corporate earnings in the industrials and materials sectors have missed analyst expectations in Q1 2025, and forward guidance has turned increasingly cautious.

Market Implications and Policy Response

Bond markets responded to the ISM report with a modest rally in Treasuries, as investors recalibrated expectations for Federal Reserve policy. While inflation remains elevated in some categories, the Fed may consider the persistent weakness in manufacturing as grounds for a more dovish tone in its July meeting.

However, policymakers face a difficult balancing act. Looser monetary policy could support domestic investment, but may also fuel inflation, particularly in services and housing. Fiscal stimulus appears unlikely, given the Trump administration’s focus on defense spending and fiscal consolidation through cuts in administrative agencies.

Outlook: Cautious, Uncertain, and Fragmented

As the ISM report makes clear, the U.S. manufacturing sector is navigating a complex set of constraints—tariff uncertainty, inflationary volatility, weakening global demand, and logistical friction.

Unless policy clarity improves and external demand rebounds, the sector may remain in contraction territory through much of 2025. While service industries continue to prop up overall GDP growth, the weakening industrial base could eventually spill over into broader employment and investment trends.

“The signal is not one of crisis,” said ISM Chair Timothy Fiore, “but it is clearly one of fragility. Manufacturers are adapting, but they’re adapting under stress.”