Despite plenty of supplies on hand, production stalls in April
|Summary
A flat reading for industrial production glosses over a decline in manufacturing output which essentially erases the prior month's gain. Aside from a pop in February, there is little evidence that the supplies rushed in ahead of the tariffs are being put to immediate use.
Manufacturers need more than a 90-day pause
Tariff-induced uncertainty has begun to bite the industrial sector. Industrial production was flat in April, but that likely still overstates the strength of the industrial sector today. For starters, April brought a 3.3% pop in utilities production, which likely more-so reflects a rebound rather than renewed demand as it comes after a near-record drop (-6.2%) in March. The largest industry group, manufacturing, also slipped 0.4%, or by the most in seven months. Mining output also fell 0.3% in April.
Today's outturn does not come as a complete surprise. The production component of the ISM manufacturing index fell in each of the past three months hitting a low in April of 44.0, the lowest reading for this survey-based measure of production in five years and consistent with contraction. In fact, over the past 20 years, the only times the production index of the ISM has been lower was during either the financial crisis or the pandemic.
Together, the data suggest the recent tariff-induced pop in manufacturing activity has begun to reverse under the weight of uncertainty. Manufacturing production received a jolt in February largely from a near-record monthly pick up in auto production, and activity continued into March leading the overall manufacturing production index to its highest post-pandemic reading. But as we cautioned last month, this 'pick-up' in activity was likely to be short-lived amid tariff uncertainty. Regional Fed surveys out of New York and Philadelphia released thus far for May suggest continued weakness in activity.
It remains to be seen how much this week's announcement of the 90-day pause of a full-blown trade war with China alleviates pressure and motivates businesses to kick-start capex initiatives. We remain cautious. The fact that this was a pause rather than roll-back of tariffs means the risk of steep tariffs is still there, just further down the line. Perhaps more striking is how fluid tariff policy remains and the fact that even in considering the latest development, we estimate the effective tariff rate to be around 14% under currently implemented policy, a notable escalation from the sub-3% rate that prevailed last year.
An interesting dynamic is that while the threat of tariffs serves an incentive to spark activity in some categories of consumer spending, there is not convincing evidence that production activity benefited from a similar jolt. Yes, firms pulled forward industrial supplies at an unprecedented clip; the resulting drag from net exports was the largest on record in the first quarter. But aside from a ramping up in machinery productions, there is little evidence that firms are putting those hoarded supplies into immediate production. This corroborates a viewpoint we see in the respondent comments section of the ISM and in our client meetings: more clarity and less variability with respect to tariffs would be helpful in guiding plans for domestic production.
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