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TARIFFS: IF IT AIN'T BROKE, DON'T FIX IT

On April 2nd, Liberation Day, Trump announced his tariffs. Tariffs are taxes and tariffs have been hurting manufacturers. For the past ten years, manufacturing has done quite well and has been on a consistent upward projection. The trend since Liberation Day has changed to downward.  

In the past decade, U.S. manufacturing has grown substantially. Much of this has been driven by a desire to reduce supply chain risks and establish facilities closer to the state's customers. The increased volatility in supply chain risks in recent years is due to the COVID-19 pandemic, geopolitical dynamics, trade tensions, rising costs, labor shortages, and natural disasters. Manufacturers learned that cost savings need to be balanced with the resilience of having a more reliable supply chain.

To help achieve this, some manufacturers have reconfigured their supply chains by reshoring portions of their production. Nearshoring also grew as these manufacturers utilized the USMCA Free Trade Agreement to source more from Mexico and Canada. In addition, foreign manufacturers started building more plants domestically to be in the high growth U.S. market. In 2022, Congress approved the Inflation Reduction Act and the Chips Act to stimulate U.S. investments in green energy products and chips.

There has also been a shift to reducing Chinese trade and growing trade with countries such as India and Vietnam, which offer cost advantages.

In late August, a U.S. Appellate Court ruled seven to four that the Trump tariffs were illegal. This ruling will have until mid-October to be appealed and is expected to go to the Supreme Court. It is widely expected that Trump will find a way around this ruling even if it is upheld. The ruling will not affect Section 232 tariffs on steel and aluminum.

Here is a brief summary of what has happened to manufacturing and the economy since the April 2nd Liberation Day:

• Employers added only 22,000 jobs in August while the numbers were revised down for the previous two months by a combined 21,000. This means only 107,000 new jobs were created in the last four months, an average of 27,000.
• The Bureau of Labor Statistics just announced a revision of the numbers from April 2024 through March 2025. The monthly-jobs-added was changed from 146,000 to 71,000. Adjustments have happened before, but this is concerning, and the process needs to be changed.
• Revised June numbers showed a net loss of 13,000 jobs, which is unusual. It was the first such decline in jobs since December 2020. Unemployment rose to 4.3% from 4.2%.
• Even though immigration policies have reduced the total jobs created by 40,000 per month, the pace of wage growth has been fairly steady, and employers are not cutting back on average hours worked.
• Manufacturing jobs have decreased in the last four months by 44,000 versus 34,000 in the previous eight months.
• Total construction spending for manufacturing averaged $80 billion during Trump’s first term in office. Under Biden’s term, it grew to $230 billion, which is almost triple the growth. Since Trump was elected, it has dropped every month for a loss of 3.5%.
• Economists anticipate higher goods prices to put pressure on inflation in coming months as Trump’s tariffs filter through to shoppers.
• U.S. consumer spending rose in July by the most in four months, indicating resilient demand in the face of stubborn inflation.
• The National Association of Manufacturers (NAM) reported a C-Suite survey where respondents cited their top business challenge was trade uncertainties, which includes tariffs and trade negotiations.

• NAM also reported in an article from the Conference Board that 71% of U.S. CEOs plan to alter their supply chains over the next three to five years.

• The average tariff rate in 2024 was 2.5%. The current tariff rate is 16.4%, which has not been that high since the 1930’s depression. I’m not saying that there will be a depression, I’m just making the comparison.

• Tariff costs from Section 232 steel and aluminum alone are estimated to annually cost the auto industry over $25 billion, the aero industry well over $2 billion, Caterpillar $1.8 billion and John Deere $600 million.

• Tariff costs for small businesses and importers employing under 500 people is estimated to be about $140 billion. There are about 236,000 small businesses in the U.S. In 2023 they imported $868 billion worth of goods.

It is all VUCA: Volatility, Uncertainty, Complexity and Ambiguity 

In a WSJ September 6th editorial, it states “What Mr. Trump needs is a broad revival in business confidence of the kind that accompanied his November victory and appeared before his tax on imports and willy-nilly interventions in private business decisions. Repeat after us: Tariffs are taxes, and taxes hurt economic growth.”

INFLATION

Steady as she goes

• The Consumer Price Index (CPI) for August rose to 0.4%. Year over year it is 2.9% versus 2.7% last month.
• Core inflation for August rose 0.3%, the same as last month. The annual rate for the year was 3.1%, the same as last month.
• Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, for July was 0.3% month over month and is 2.6% year over year. Core prices (which exclude food and energy) were 0.3% in July, the same as June and are up slightly at 2.9% versus a year ago. Inflation-adjusted consumer spending was 0.3% as expected. While not adjusted for inflation, wages and salaries in July jumped 0.6%, the most since November. Real disposable income rose 0.2%. The savings rate was unchanged. This is positive for inflation and the economy.
• The Producer Price Index for August fell 0.1% after rising 0.9% in July, an unexpected surprise and the first drop in four months. Prices are up 2.6% on an annual basis versus 3.4% annualized in July. Core prices, excluding food and energy, fell 0.1%. This is positive news on the inflation front.

MANUFACTURING

Tariff volatility continues to cause manufacturing uncertainty

• The Manufacturing PMI® ISM rose in August to 48.6 from 48 in July and has been in contraction for more than two years now. The good news - new orders were up by 4.3 at 51.4 and in expansion. The bad news - this was offset by production which fell into contraction by about the same amount. The price index was down 1.1 at 63.7, its lowest level in six months. The backlog of orders was down 2.1 at 44.7 and the employment index rose slightly to 43.8.

• PMI also reports that only Miscellaneous Manufacturing and Primary Metals grew in August. These other industries that affect metals remained in contraction: Machinery; Fabricated Metal Products; Computer and Electronic Products; Transportation Equipment; Electrical Equipment, Appliances and Components.

• U.S. non-defense capital goods new orders, excluding aircraft, rose 1.1% in July. Orders rose across all major categories, led by electrical equipment (+2.0%), machinery (+1.8%), and primary metals (+1.5%), while fabricated metal products (+0.7%) and computers and electronic products (+0.6%) also grew at a healthy pace.

• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, rose a healthy 0.7% in July. If unchanged in August and September, these orders would be up at a 4.4% annualized rate in Q3 versus the Q2 average.

• Factory orders for July, excluding transportation, increased 0.6% month-over-month following a 0.4% increase in June. New orders for primary metals (+1.6%), machinery (+1.9%), computers and electronic products (+1.2%), and electrical equipment, appliances, and components (+1.9%) were all up and are a positive sign for the future.

• Construction spending rose 0.1% in July after dropping 0.4% in June. Home mortgage rates for 30-year loans are at 6.6% and demand is tepid.

• Car and light truck sales in August were steady at 16.4 million annual rate from July.

• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our nine locations and a diverse industrial base. Based on our twelve-month trailing average, volumes for August for fell 11%, the same as July. Tariffs hurt.

CHINA

Strange unintended consequences: An alliance between India and China

India and China have been neighbors and enemies since India became independent in 1947. In October 1962, there was the Sino-India war with China attacking India along their border. It lasted only a month with China winning the war. China declared a cease fire and no land was exchanged. Other border skirmishes took place in 1967, 2017, and 2020. There has been limited trade between the countries.

On August 27th, Trump announced he was raising the tariffs on India to 50% from 25%. Trump said the reason was because of India’s purchase of cheap oil from Russia. India has been buying this Russian oil since the beginning of the invasion of the Ukraine. Trump likes to threaten and then back down. This 50% tariff, if implemented, would be devastating to the economy of India. This time the threat had unintended consequences.

With the 50% U.S. tariffs, the unbelievable happened. The enemy of my enemy is my friend. The Prime Minister of India, Modi, arranged to meet China President Xi Jinping along with Russia’s Putin in Beijing. This reminded me of the old adage, “Keep your friends close, and your enemies closer.”

China needs new markets and consumers for its excess manufactured goods. India is the most populous country in the world with 1.46 billion people. It is relatively underdeveloped and is growing. India needs rare earth metals, magnets and technology that China can provide. India is smart and knows that this relationship with China could be harmful in the long term. There is little trust between them. We will see how long this newly established comradery will last. This is not a done deal.

China’s PMI for August was 49.4 from July 49.3. The Caixin private manufacturing survey rose into expansion to 50.5 from 49.5 in July. China continues to be plagued with its housing crisis, aging population and poor consumer confidence. China is facing deflation as Chinese consumer inflation numbers fell at their fastest pace in six months in August down by 0.4% year over year. Chinese producer prices are worse and off by 2.9% year-over-year in August, although less severe than July.

On August 11th, the U.S. postponed the tariffs on Chinese goods for another 90 days to November 10th, 2025. This extension provides continued relief from escalating tariffs and allows for further trade negotiations between the two countries on issues like the trade deficit and unfair trade practices.

METALS

Section 232 and the Trump tariffs

The Trump tariffs have been declared illegal and are now fast tracked to the Supreme Court for an early November ruling. We should note that none of this back-and-forth tariff rulings will be impacting aluminum and steel tariffs, both operating under the separate Section 232 guidelines. 

On September 9th, the Midwest Premium rose to $0.7565 per pound. That was the all-in price for prime aluminum in mid-2020. Yikes! Now the total prime price is almost $1.95 per pound. Despite the high aluminum prices and the tariff uncertainty, Harbor sees aluminum demand continuing to expand through the year end and into next year. Harbor bases their analysis on “pent-up demand, restocking needs, diminished trade uncertainty and lower interest rates.” 

Prime aluminum scrap prices for September are mixed. Segregated aluminum clips are up slightly while most other grades are drifting lower. This is due to the high Midwest Premium attracting scrap from all around the world. Most secondary scrap items are about the same. Copper prices rebounded to the July levels. Steel prices were slightly lower and stainless steel was about the same.

CLOSING

The proof is clear that tariffs are hurting the manufacturing sector, the economy, and also damaging relationships with our allies and trading partners. On the other hand, it’s strengthening China’s relationships with our allies. I am expecting inflation to grow later this year and into 2026. I believe in the near future we will see a lowering of tariff demands to a more reasonable level. Let’s get this done before it’s too late.

“A lot of people believe, and I do at times, that some of our trade agreements are lopsided, and we've got to look at them. But that doesn't mean that we're going to put a tariff on everything.”
- Richard Shelby, former Alabama Republican Senator