New Trump Tariffs Are a Top Issue for Supply Chains, Managers of ISM Economic Reports Say

With the Trump administration’s latest tariff increase on goods from China set to start Friday, the managers of ISM’s economic indexes spent part of their Wednesday webinar addressing concerns about the new levy’s effect on the economy, procurement and supply chains.

“I was hoping we wouldn’t still be talking about (tariffs), but alas we still are,” said Timothy Fiore, chair of the Institute for Supply Management’s Manufacturing Business Survey Committee, which puts out the Production Manufacturing Index (PMI) on the first of every month.

“If we’d had this conversation two weeks ago, I would have been more optimistic,” he said. “With the news this week, I don’t know that I have an opinion. But people who know and that I’ve talked to expect the tariffs to go into effect Friday.” (Click on the chart below to see ISM's findings on tariffs before Sunday's news of more possible levies.)

(Source: ISM webinar)

The webinar was meant to discuss the findings of the PMI report and the results of the Non-Manufacturing Index (NMI), which measures growth in the services sector. The overall finding for each report is that the economy is growing, but at the slowest rate in years.

"The April PMI registered 52.8%, a decrease of 2.5 percentage points from the March reading of 55.3%,” the report said.

“The NMI registered 55.5%, which is 0.6 percentage point lower than the March reading of 56.1%. This represents continued growth in the non-manufacturing sector, at a slightly slower rate,” that report said.

A reading over 50 indicates economic growth, while a reading under 50 reflects a contraction.

The Trump administration on Friday plans to raise the tariff rate from 10% to 25% on $200 billion in goods from China. Later, another 25% tariff could be imposed on $325 billion in goods from China. The news has shaken stock markets. And trade talks are ongoing, but China has vowed to impose countermeasures, The Washington Post reports.

Fiore said companies are raising prices to pay for tariffs.

And the Wall Street Journal recently looked into who pays for the tariffs — U.S. consumers. “Tariffs are taxes paid by American businesses and consumers, not by China,” said David French, a senior vice president at the National Retail Federation, in the Journal. “A sudden tariff increase with less than a week’s notice would severely disrupt U.S. businesses, especially small companies that have limited resources to mitigate the impact.”

ISM’s Fiore praised supply chain professionals for being resilient in times like these and finding solutions that can reduce costs for businesses. One tactic is to move your production out of high-tariff areas.

“Alternate supply routes is an option,” he said. “The challenge is that once you change supply chain routes and the price points are good, then the supply chains won’t go back to the where they were.”

In the discussion of other areas of interest in the PMI and NMI reports, the subject of import/export numbers came up, as did the topic of an expected rise in input costs.

On the manufacturing side, export and import numbers were down, yet growing at a slower rate. Fiore attributed that to the effect of tariffs and companies already adjusting their supply chains.

On the non-manufacturing side, imports and exports were up and growing at a faster rate, the NMI report shows.

“I'd like to say that it was because there was anticipation of these new tariffs that are being proposed or might be implemented very shortly. But, no, that's not the case,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “I think part of it has to do with cycle time off of holidays, and also we saw early on last year … companies went ahead and started forward-buying as best they could.”

Spend Matters asked the ISM managers what impact rising  input costs would have on procurement targets, especially because tariffs have had a 7% cost increase on those hit by the tariffs.

Fiore, of the manufacturing side, gave an example from the high-tech industry.

“That sector has performed really well for the last 18 months,” Fiore said. “In spite of  that $200 billion of tariffs that was put on it, I think it was probably late summer of last year.

“It's primarily because the demand has been so strong for electronic products, and the margins are relatively high that they had been able to deal with the price increases.”

And Fiore said the reality is that management must pay higher prices to meet the quality that’s needed and to keep production going.

“If it means you have to pay more money for the product, then you'd have to do that,” he said. “And as we (in the supply chain profession are) resilient people, we find ways to offset that cost either through some other means and we find a way to mitigate that cost increase at some point in the future.

“So it's definitely impacting the supply chain people in the high-tech sectors. But you know, that sector has been growing strongly.”

At ISM’s annual conference in Houston last month, Fiore and Nieves said that businesses had adjusted to the new tariff climate and that industry leaders expected the trade dispute with China to be resolved. But the expected tariff hike on Friday changed Fiore’s assessment.

“Things will get worse before it gets better.”

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