The Decisive | Season 3 Ep.12 - PMI in Focus: Navigating Uncertainty in Trade and Tariffs

View Full Transcript

Paul Smith  

Hello, and welcome to our latest PMI-based podcast from S&P Global Market Intelligence. I'm Paul Smith, a senior economist at S&P specializing in the production of the Purchasing Managers Indices. On today's podcast, I'm joined by 2 fellow economists from our team. Firstly, hello, and welcome to our regular contributor to these PMI-focused podcasts. It's Andrew Harker.

Andrew Harker  

Hi there, Paul. It's good to be back on the podcast. It feels like a while since we did the last one. I think it was back in last November. So it's definitely been plenty going on in the global economy since then. I think you'll agree, one of which is all the talk around tariffs. And we've actually started to see some of those tariff announcements impact the PMI data. So it would be great to talk about that today, if we can.

Paul Smith  

Yes, absolutely. I'm sure we can fit all that in. And secondly, we have Joe Hayes. Hello to you, Joe. Good to have you with us. What's on your agenda today?

Joe Hayes  

Paul, yes, thank you. Good to be back on the podcast. I'll make it a couple of years actually since I've been on. So yes, great to be back and really looking forward to getting stuck into some of the analysis of the February PMI numbers with some discussion around what's happening in the U.S. and also just broadly discussing some of the research we produced back in November, detailing some of the PMIs we think are best placed to help you navigate through this ever-changing world with tariffs now.

Paul Smith  

So yes, this is the first podcast we've produced in 2025 so far. And it is fair to say that we face a much more uncertain global economic backdrop than we did last November. Back then, we noted that growth was broadly steady, albeit with some divergences between subdued manufacturing sector and some reasonable service sector performance, but there's also some signs of a softening labor market at a global level. Now, just looking at our JPMorgan Global Composite PMI data for February. And we've seen global growth sustained, but actually at its slowest pace in over a year. And we've actually see signs of kind of falling employment, albeit marginally across some major economies around the world like the U.S., the Euro area, and China. Slower growth is predominantly seen in the services sector at the moment because manufacturing output, in stark contrast to maybe what we saw last November, actually rose in February to the greatest degree since June 2024. So I think this is quite a good place to start our discussion today and maybe trying to understand a little bit of the reasons why we've seen some underlying improvement in overall manufacturing output into February. And maybe, Joe, you could help us understand this. Maybe just looking through the prism of the U.S. data.

Joe Hayes  

Yes, certainly, Paul. So the U.S. manufacturing sector has enjoyed a bit of resurgence so far in 2025, actually, definitely picking up some momentum after a soft patch in the second half of last year. In February, the S&P Global PMI data showed strong accelerated expansions in both factory output and new orders. For output, it was actually the fastest rise we've seen since May 2022. And for new orders, those are up by the largest margin in the year. So this upturn we're seeing, this kind of resurgence in manufacturing in the U.S., is clearly a demand-driven one. Now that will sound fairly positive at face value, but further scrutiny of the data through our sub-indices revealed that this upturn in sales was exclusively driven by the domestic market as new export orders were actually down for U.S. factories in February. So what I think this is pointing to from the PMI is a kind of a substitution effect where you've got U.S. buyers who are clearly choosing to source their purchases a bit closer to home to mitigate against some of those adverse tariff-related effects. However, it now potentially means that U.S. manufacturers are a lot more reliant on their U.S.-based customers to fill up their order books.

Paul Smith  

I think what's interesting is that we've seen a little bit of a definite opposite impact really in the Canadian manufacturing economy. And it's the potential imposition of tariffs. And I do use that word potential imposition of tariffs on exports to the U.S. largely because at the time we were conducting our surveys during February, we were kind of in that period between. There was an announcement that we were likely to see 25% tariffs on goods and services from Canada to the U.S. before then we had that kind of 1-month reprieve or delay in the imposition of tariffs by the U.S. And we were conducting that survey in that interim period. So in stark contrast to the U.S. and probably broader global data, manufacturing production volumes in Canada declined in February. That was actually the first fall in output we've seen in 5 months and to the greatest extent that we've seen since last July. We also saw an even steeper decline in new orders as product markets were pretty much, I would say, kind of paralyzed really by concerns over the application and size of these tariffs in the coming months and export trade suffered. Notably, probably the one parallel here with the U.S., in the export trade for Canadian manufacturers fell to the greatest degree since we've seen since last September, largely on back of reduced sales to U.S. clients. That's largely because many firms were observing that their clients are kind of growing increasingly cautious regarding tariffs, particularly over the potential of rising prices and rising costs to them. Really, what we're talking about here is that uncertain tariff landscape, there's a huge risk to buyers of seeing that big spike in prices due either to general lead times between orders to production to shipping or maybe just any delay in delivery, literally something as innocuous as a blown tire on a delivery truck before it's crossed through customs could actually lead to the end buyer having to face thousands of dollars in additional charges.

Andrew Harker  

It's really interesting in hearing you guys talking about the export situation because we actually saw something very similar in Mexico in February. So Mexican manufacturing new export orders fell at the sharpest pace for almost 4 years during February. And again, as you mentioned with Canada, Paul, the U.S. was highlighted as a destination in particular, where exports have declined. It's really interesting to think about those examples of what companies are thinking when they're making these decisions on where to purchase from. Maybe some are looking at it and thinking this deal keeps getting worse all the time with the potential introduction of tariffs and the uncertainty of what the ultimate cost of goods is going to be. And so maybe looking elsewhere for products or just holding off for a bit.

Joe Hayes  

That shared theme in North America in February quite clearly of export weakness. And why was actually quite interesting as well to touch on, which is something which potentially hasn't really got as much traction in the mainstream news, I guess, with tariffs. But of course, looking at the the anecdotal responses that we get through in lots of U.S. companies who export mentioning the uncertainty around trade policy was clearly a drag on their sales overseas. But actually, another factor at play was the strength of the U.S. dollar, which we've seen through to February with many of our panelists noting that their goods have actually become a lot less competitive internationally. Now of course, since our February survey, the U.S. dollar has actually weakened somewhat. It will be interesting to keep an eye on those March numbers coming out to see what effect this may have, if any.

Andrew Harker  

Yes. If I could just jump in there, Joe, talking about the sort of the impact of the dollar strength on U.S. exports. On the other side of the coin, we actually saw in Mexico companies talking about that as having increased their input costs. So in the manufacturing sector again in February, they're talking about, yes, that dollar strength being a big factor behind a sharp rise in input prices for Mexican firms.

Paul Smith  

It's a similar story in Canada to a degree. The actual pace of input cost inflation is fastest in almost 2 years. That was really 2 factors. One was that kind of aforementioned at the time, strength of the U.S. dollar, which is kind of acting to push up imported goods costs. But we've also seen that suppliers have started to raise their prices already to take into account tariff introductions. That's then led Canadian manufacturers to raise their selling prices accordingly, albeit at a slightly softer rate than we actually saw in January as firms are struggling to pass on higher input costs given, for them, what's an increasingly subdued business environment.

Joe Hayes  

Yes. Even the pricing trends in the U.S. are particularly interesting. And just looking at our PMI manufacturing input prices index for the U.S. And I've noted since November last year, that index is up by nearly 10 points. It's actually quite a staggering amount over such a short period of time. And now input price inflation for U.S. factories is its strongest since late 2022. And much like you touched on there, Paul, with Canada, we've got plenty of U.S. companies on our panel noting that their suppliers have increased their prices, which in turn has seemed to result in manufacturers in the U.S. also raising the prices charged for their goods, and we saw inflation of output prices at a 2-year high in February as well. And I guess, overall, what it shows is that, that kind of ripple effect from tariffs, how a single goods can be subjected to tariffs in multiple instances over its entire production life cycle. And as a result of that, we've got companies passing on this high cost to their customers.

Paul Smith  

I think more broadly just thinking about prices and of course, this uncertainty that we've got in trade, that's really influencing the outlook of companies, again, just through the lens of the Canadian manufacturing sector, business sentiment actually declined markedly in February. Our future output index, which is the only kind of index that we use in the monthly PMI data to measure expectations, that actually indicated outright pessimism amongst manufacturers. And that's the first time in almost 5 years that we've seen that. That respective index fell nearly 9 points since January to below what we call the neutral mark of 50, which is a huge drop in itself. And the fact that firms are actually now foreseeing a reduction in production volumes over the course of the coming 12 months is pretty significant because the only other time we've seen that in our survey history was back in April 2020, which is, of course, during the opening wave of the COVID-19 pandemic. So that has knock-on effects and consequences, of course, it's that firms are really adopting an increasingly cautious attitude in Canada. So again, on the manufacturing sector, they cut employment quite noticeably and to the greatest degree since June 2020, although it's still quite modest in the context of what we were seeing during the pandemic.

Joe Hayes  

I know on this podcast, Andrew and Paul, you've been partial in the past to an eye-catching statistic from the PMI. And I think I've got a pretty striking one this month, at least one that jumped out to me when I was kind of reviewing the data. And you mentioned there, Paul, about the pessimism amongst Canadian manufacturers. Well, in the U.S., confidence did weaken in February. But overall, manufacturers still retain a positive year ahead outlook for growth. Now if you were to measure the difference in expectations, which we can do this by comparing our manufacturing PMI future output index for the U.S. and Canada, the gap between those 2 indices is the largest we've ever seen in the 13 years of available expectations data. And why is this striking? Well, to me, it's because you've got 2 neighboring countries with deeply integrated supply chain. So you generally expect there to be some co-movement between the 2, which does make this divergence particularly staggering. But I guess the takeaway for me from that is that you've got companies in North America and I guess, particularly Canada in this instance, who are especially concerned about the potential for tariffs to possibly considerably shake up North American supply chains.

Paul Smith  

That's a great catch, Joe, in terms of a statistic there. I know you definitely raised an eyebrow or 2 from myself and Andrew when you mentioned that one. So...

Andrew Harker  

You earned your place on the pod with that one, Joe.

Paul Smith  

I think we might even resurrect statistic of the month at this rate. I think -- so I guess just thinking a little bit more broadly now about the outlook, Joe. We've obviously touched upon there some of our forward-looking data there with our future output index. But what are some of the other PMI indicators that you think are maybe worth watching to help us really navigate the months ahead as we look to monitor the economic impact of tariffs?

Joe Hayes  

Yes. I think we've touched on many already, but this goes back to some of the research that we compiled just after the U.S. presidential elections back in November. We produced a report which details all of the PMIs that we think are best placed to untangling the economic impact of tariffs, which is freely available for anyone who's interested to read that. But in that paper, we talk about things like input prices and output charges, which we touched on there as well. Those are your channels through which you can monitor any inflationary impacts from tariffs, not just in North America, but in other parts of the world as well. The JPMorgan Global Manufacturing New Export Orders Index is unrivaled really as a benchmark of global trade conditions in terms of its timeliness. And as a key barometer of the global economy's health, you want to keep a close eye on this one, even at the country level as well as your leading economic indicators and benchmarks for trade conditions. Another one as well, tariffs may have ramifications on the inventory cycle, and it's a topic which we go into detail in the paper I mentioned. but we can monitor the inventory cycle through our quality of purchases PMI, which measures manufacturers buying volumes of raw materials, components, et cetera, and also our stocks of purchase PMI, which measures changes in holdings of these items by manufacturers. And I highlight these 2, Paul, because in 2018, we witnessed a clear change in, I guess, manufacturing procurement strategies once tariffs were implemented. For instance, we saw stockpiling becoming more prevalent as companies built up buffers into their inventories to mitigate supply chain risks and cost saves.

Paul Smith  

That's a great summary, Joe there, especially I think some colleagues would look to that, especially that global manufacturing data on exports. I think they would call it their desert island statistic, the one that they really can't leave home without, but you had some great calls there on some other indicators to be looking out for. You talk about changes there around company behavior around procurement and stock patterns. Of course, apart from the indices themselves, these can move for a variety of reasons. Is there anything else within our data sets that can help us understand why those indices might have moved?

Joe Hayes  

Definitely, Paul. So I just want to quickly give a bit of background to the PMI survey itself. So when a company completes our survey, they provide us with extra information behind their response. So a basic example of that would be, let's say, a company tells us that their output levels have risen and to accompany that response, they'll give us an explanation for that like we've received more orders. And through our PMI comments trackers, we are able to quantify this qualitative information our panelists provide us. This is really unique and a really powerful aspect of the PMI product, the fact that you get the why to accompany what companies are telling us why something has happened. And we have trackers which cover a broad range of macroeconomic themes, one of which is our safety stockpiling tracker. And with this index, we can actually measure to what degree businesses are, say, building up inventories due to tariffs, for example. And I think as well, this is maybe a good opportunity to bring in another index we compile, which is our GEP Global Supply Chain Volatility Index, which I think is an indicator worth watching in the current environment because what it does is essentially rolls out many of the previously mentioned indicators, both quantitative and qualitative into one combined score, and it's available by region, too. So it's kind of your one-stop shop to track supply chain conditions. But going back to those behavioral changes you mentioned there, Paul, that we may see from businesses as a result of tariffs. One of my go-to PMI comments trackers generally all the time really is our uncertainty index, which simply tracks mentions of uncertainty by companies across our survey panels. Now in February, these reports were nearly 3x more common than on average, and they're now at levels similar to what we saw in 2019 when we also had tariffs. And I guess the concern here is that when businesses feel uncertain, more so than normal, they tend to become more apprehensive towards big spend decisions. So in the current environment, there's potential for business investment to take a hit as well.

Andrew Harker  

Yes, it's great to highlight that paper, Joe. I think hopefully, we can get a link put into that to the description so that people can click through and have a look because it's super useful. But I just wanted to pick up on something you said there about business investment because we actually cover that a bit as well in our business outlook surveys, which are forward-looking surveys that we conduct 3 times a year. And actually, the last one we did was in February. So it's quite timely really. We just released the results of that a couple of weeks ago. And that contains 2 questions about investment plans, one around capital expenditure and one on research and development investment. And what we saw at the global level was that sentiment had declined really from late last year on both of those measures. So companies are less bullish, I guess, in line with what you're saying really, that uncertainty is leading to some hesitancy around investment decisions. And you even had some economies that we cover predicting a drop in research and development spending, notably the U.S., U.K., Germany and France. So definitely some signs from our business outlook survey as well of that hesitancy around investment spending.

Paul Smith  

And just to remind listeners that business outlook survey is something where we ask our PMI panel 3 times a year, their outlook and expectations for a variety of business metrics like activity, investment, prices, employment, et cetera. So it is separate to the monthly PMI data, which is, apart from that future output index, is all about the here and now, what's actually happened in output in a factual sense or orders, stocks, et cetera, whereas this survey here is, this outlook survey is in that kind of forward-looking 12 months ahead around those business metrics like I just mentioned. So I guess, Andrew, just anything outside of that investment angle, anything else that you'd want to pick out from the latest survey results?

Andrew Harker  

I guess on a similar theme really, the employment data stood out as well. It's actually hiring plans were the lowest since the COVID pandemic back in 2020. So yes, similar to what we saw with investment, real hesitancy amongst firms about whether they're going to take on extra staff and build up workforces. Just looking at the main index from the business outlook survey, which is around business activity and output. That was broadly stable from the picture last October, actually ticked up slightly at the global level. So that was a reasonably stable picture. But yes, with that hesitancy around investment and employment, probably the main story really.

Paul Smith  

It's really quite challenging I think just to sum up where we are at the moment. It's a very fluid situation, and it kind of feels inevitable somewhat that we might see some disturbance around the global economy in the near term at least, especially when thinking about trends in output prices, employment trade. Of course, I will always stress this, that the best way to track these impacts in the coming months is, of course, through our monthly and very timely PMI data, which is now available for over 40 countries around the world, including all major economies and regions. So, and I think this podcast is probably going to land at a point that's quite timely in the sense that our flash PMI data is very close to being released. And even those who may be listening to this on the 24th of March, we'll be able to get some indications of how tariffs are impacting some of these economies, including the U.S. and the Eurozone. And then a week later, we'll be able to see how Canadian and Mexican PMIs are faring, 2 countries that we discussed extensively in this episode. So with all that in mind, all that's left for me to say today is thank you to Joe and Andrew for their insight, and we look forward to spending more time analyzing the PMI data on The Decisive podcasts later in the year.