Factory Floor Flashes Red: Manufacturing Slump Warns of Broader Pain
US manufacturing is caught in a protracted slump, with the ISM Manufacturing PMI stuck below 50 in 28 of the past 30 months. From November 2022 to December 2024, it didn’t register a single expansionary reading – a 26-month contraction streak, the longest on record. Hopes of a turnaround were dashed in March when the index slipped below 50 once more with April’s reading declining to 48.7.
Manufacturing accounts for around 10% of GDP, but it often signals broader shifts in the economic cycle. A PMI below 50 means more firms report deteriorating conditions than improving ones. The length of this downturn implies more than a passing slowdown; it suggests demand is weak, in part due to the uncompetitive nature of US manufacturing, which in turn is heavily influenced by an overvalued dollar. A stronger dollar makes US goods more expensive abroad and imported goods cheaper at home, undercutting domestic producers. Orders are shrinking, production is slowing, and firms are reporting margin pressure as costs rise.
Headline GDP growth has muddled through, but the detail paints a more fragile picture. Real GDP fell 0.3% in Q1 2025, while real final sales – a better gauge of demand – dropped by 2.5%. These figures mirror what manufacturers are experiencing. The ISM’s Production Index fell to 44.0 in April, and export orders collapsed to 43.1 – the weakest in over a year.
Inventories are also rising, but not for the right reasons. Businesses have stockpiled goods ahead of new tariffs, only to find demand lacking. The resulting overhang threatens further production cuts. ISM officials have described the build-up as precautionary and temporary, yet with new orders weak, the adjustment could be painful.
Tariffs are amplifying the strain. Companies report halted Chinese shipments and cancelled client orders due to unpredictable import costs. In some sectors, tariffs of over 100% have rendered products uncompetitive. The ISM Prices Index jumped to 69.8 in April, the highest since mid-2022, reflecting rising costs for materials like steel and aluminium. Yet soft demand makes it difficult for firms to raise prices, squeezing margins.
The employment picture is also deteriorating. April’s factory employment index ticked up slightly but remains in contraction. Firms are laying off staff or halting recruitment altogether, in sharp contrast to the relative strength seen in the services sector. That divergence is increasingly unsustainable.
Unlike past recessions, this isn’t a collapse but a slow erosion. PMI readings in the mid-to-high 40s point to steady, grinding contraction. The comparison is more with the industrial slowdowns of the 1990s or 2015–16 than the crash of 2008. But even without a formal recession, the risks are mounting.
Markets now await today’s payrolls report, which could prove pivotal. The Federal Reserve faces a complex balancing act: tariffs are adding temporary upward pressure to inflation, while broader growth indicators turn soft. Rate cuts are unlikely without clear labour market deterioration, particularly a rising unemployment rate. Yet if the Fed delays too long, it risks keeping rates too high during a slowdown already well underway. For investors, the message from the factory floor is becoming harder to dismiss: the manufacturing slump is no longer a warning sign — it is the story — and one unlikely to improve unless the dollar falls sharply, the Fed cuts rates meaningfully, or both.
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