By Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing grew for the first time in more than two years in January; however, the durability of this recovery remains uncertain following President Trump’s imposition of tariffs on goods from three major trade partners over the weekend.

While Trump stated on Monday that he would pause the 25% tariffs on Mexican and Canadian goods, a 10% levy on Chinese goods will proceed. Economists predict that the ongoing tariff threats may hinder manufacturing due to a strong dollar that makes U.S.-made products less competitive.

“Tariffs represent a negative supply shock, which hurts production and raises prices, similar to what we experienced during the pandemic,” said Kathy Bostjancic, chief economist at Nationwide. “Another round of tariffs from the U.S. would amplify the negative effects on inflation and GDP growth.”

A survey by the Institute for Supply Management (ISM), released on Monday and conducted before the escalation of trade tensions, indicated that raw-material inventories at factories were declining, causing prices to increase for the fourth consecutive month. The ISM reported that its manufacturing PMI rose to 50.9 last month, the highest since September 2022, up from 49.2 in December. This was the first rise above the 50 mark since October 2022, indicating growth in a sector that comprises 10.3% of the economy. Reuters economists had projected a PMI of 49.8.

Manufacturing has faced challenges due to the Federal Reserve raising interest rates by 5.25 percentage points in 2022 and 2023 to curb inflation. The Fed began easing its policies in September, cutting rates by 100 basis points before pausing in January amid uncertainties surrounding the impact of the administration’s policies, including deportations.

While stocks on Wall Street initially fell, losses were partly recovered. The dollar declined against a basket of currencies, although it is still being supported by tariff measures. U.S. Treasury yields dropped as investors sought safe havens.

SNARLED SUPPLY CHAINS

Manufacturing output fell by 0.4% from Q4 2023 to Q4 2024, according to Fed data. “The ongoing threat of tariffs implies a much stronger U.S. dollar, which would also affect manufacturing, as about half of manufactured goods are exported,” said Veronica Clark, an economist at Citigroup.

Eight industries reported growth last month, including textile mills, primary metals, machinery, and transportation equipment. Conversely, sectors experiencing contraction included miscellaneous manufacturing, wood, and computer and electronic products.

Producers of transportation equipment noted, “Alleviating supply chain conditions are noticeably reverting to acute shortage situations,” expressing concerns about more supply chain shortages. In the computer and electronic products industry, producers commented on the continuous monitoring of tariffs’ impacts on manufacturing materials. Electrical equipment, appliances, and components manufacturers noted that business is gradually improving.

The ISM survey’s forward-looking new orders sub-index surged to 55.1 last month, up from 52.1 in December, while factory production also saw a pick-up. The prices paid by manufacturers soared to an eight-month high of 54.9 from 52.5 in December, surpassing economists’ expectations of a rise to 53.5.

Supplier delivery performance was marginally slower, with the supplier deliveries index rising to 50.9 from 50.1 in December. A reading above 50 indicates slower deliveries. Timothy Fiore, chair of the ISM’s Manufacturing Business Survey Committee, noted that companies likely did not receive as much material as needed.

Inventories decreased, and imports increased, indicating that manufacturers have been front-loading materials ahead of tariffs. Factory employment expanded for the first time since May but has not aligned with manufacturing payrolls in the government’s employment report.

Higher tariffs may hinder the construction sector by raising the costs of lumber, the most significant input in homebuilding, among other components. Construction spending rose 0.5% in December, primarily driven by single-family homebuilding, according to a separate report from the Commerce Department’s Census Bureau.

Even if tariffs are eased or removed this year, new protectionist measures may limit growth in residential investment and business investment in structures, warned Bernard Yaros, lead U.S. economist at Oxford Economics.