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After Slowing First Half, Will Manufacturing Hit the Brakes?

Bill Koenig
By Bill Koenig Senior Editor, SME Media

COMMENTARY

The manufacturing economy has been tapping the brakes during 2019’s first half. The question is whether it slams the brakes during the year’s second half.

Take, for example, the Institute for Supply Management’s manufacturing index, known as the PMI.

In May, the index represented “near zero growth,” according to Timothy F. Fiore, chair of ISM’s Manufacturing Business Survey Committee.

The index for May was 52.1 percent, the lowest level since 51.7 percent in October 2016. A reading above 50 percent means the manufacturing economy is expanding. It was last below 50 percent in August 2016.

Another barometer: U.S. manufacturers added 284,000 jobs in 2018. The pace this year has slowed down, including some months with job losses.

There are various reasons for the slowdown. U.S. light-vehicle sales are falling off after four consecutive years of 17 million or more. Interest rates are higher. A big business tax cut had provided a boost but that appears to have run its course.

For the second half of 2019, tariffs may be a big factor. The U.S. already is in a trade war with China. The two sides haven’t been able to resolve differences. As a result, the trade war may expand even further.

Tariffs are taxes on imported goods. Tariffs are paid by importers of goods. Those costs usually are passed on to customers. Tariffs are not paid by one country to another.

National Security Threat

What’s more, the Trump administration has declared that auto imports represent a threat to national security. As a result, the clock is ticking for additional tariffs on vehicles and parts.

That’s likely to hit the auto industry hard. Automakers and suppliers have developed supply chains that crisscross the U.S.-Mexican border. Also, Automakers use their Mexican factories to export vehicles to countries beyond the U.S.

Auto tariffs, if they are implemented, would be intended to spur U.S.-based automakers to bring manufacturing back to this country. But the current supply chains couldn’t be taken apart very quickly. Also, closed auto plants would require huge investment in new tooling.

For example, General Motors Co. has ceased operations at its Lordstown, Ohio. The plant isn’t officially closed but no Chevrolet Cruze small cars are being assembled there.

President Donald Trump has criticized GM for the shutdown. GM, in the meantime, is concentrating on sell SUVs, crossovers and large pickups. GM may sell the Lordstown plant to Workhorse, an electric vehicle startup company.

U.S.-Mexico Tension

In May, Trump threatened to impose 5 percent tariffs on all imported Mexican goods. The idea was to pressure Mexico to help stem the flow of immigrants to the U.S. The administration threatened to increase the tariffs in increments until they reached 25 percent in October.

The U.S. and Mexico cut a deal early this month that ended the tariff threat, at least for now. But auto industry executives got a preview of the anxiety they’ll face if the Trump administration implements vehicle and parts tariffs later this year.

In short, after a strong 2018, manufacturing faces a lot of uncertainty this year. The sector has kept its head above water so far. Whether that continues isn’t certain as the industry enters the second half of 2019.

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