February 3, 2025

QuickTakes

Make Manufacturing Great Again!

Markets were abuzz with headlines from Washington today. The S&P 500 opened 1.7% lower on the weekend's news that President Donald Trump announced that he would slap 25% tariffs on Mexico and Canada on Tuesday. But losses were pared significantly after Trump's call with Mexican President Claudia Sheinbaum resulted in a one-month delay of tariffs as well as bilateral cooperation on fentanyl, immigration, and countering China.

Ultimately, the S&P 500 fell less than 0.8% today. A quick spike in the price of crude oil also fully reversed, and that was before a similar deal was reached between Trump and Canadian Prime Minister Justin Trudeau after the market closed. With energy security of the utmost priority to this administration, crude oil prices could retest their 2021 lows in the coming quarters (chart).

For all the chatter about tariffs upending global trade, US manufacturing—the sector that’s the most sensitive to such headlines—appears to be staging a comeback. Today's economic updates supported our view that the economy's strength and resilience can minimize any negative externalities from Trump 2.0's agenda. Here's more on today's data:

(1) Manufacturing PMI. January's ISM M-PMI finally rose above 50.0 after 26 months in contraction, its longest spell below 50.0 on record. It reached 50.9 on the backs of strong new orders, expanding employment, and higher production (chart).

Interestingly, manufacturers' comments on global trade in the ISM report were even-handed. On the positive side, a computer equipment company said that China's stimulus was boosting business. In terms of negatives, a defense & aerospace company said critical minerals supply chains tied to China were tightening rapidly. On balance, most comments were cautiously optimistic.

(2) Manufacturing hours worked. The jump in January's M-PMI boosted the Atlanta Fed's GDPNow tracking model's forecast to 3.9% (saar) real GDP growth this quarter. While it is early days to gauge Q1's GDP, a rolling recovery in the manufacturing sector would be a big boost for economic growth after the sector was in a rolling recession through much of the past three years. Friday's monthly employment report will show whether manufacturing hours worked rose again in January, which would signal a third consecutive monthly increase in production (chart).

(3) SLOOS. One reason why producers might be more upbeat is because access to credit is becoming easier. The New York Fed's Q1 Senior Loan Officer Opinion Survey showed banks are ready and willing to lend. Banks are seeing rising demand for commercial and industrial (C&I) loans, and they're reducing borrowing costs for those loans, too (chart).

Increased commercial and industrial lending likely means that inventories are being rebuilt, which should boost Q1 real GDP growth after inventory drawdowns weighed on it last quarter. More importantly, this means that manufacturing and construction firms are starting to expand, which augurs well for capacity and production.

(4) Tariffs. And what about Trump's pesky tariffs? So far, they seem to be working quite well as threats. Trump likes to compare himself to President William McKinley, who favored tariffs. Trump reminds us more of President Teddy Roosevelt, who famously said "speak softly and carry a big stick; you will go far." Trump speaks often and loudly threatening to impose big tariffs to get his way. So far, his approach seems to be producing favorable results.

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