Manufacturing Stuck in Contraction as Tariffs and Weak Demand Undercut Recovery

In September 2025, U.S. manufacturing activity showed a modest flicker of life but not enough to break free from contraction. The Institute for Supply Management (ISM) reported that the Manufacturing PMI rose to 49.1%, up from 48.7% in August. While that 0.4‑point increase is welcome, it still leaves the sector on the wrong side of the 50‑point threshold that separates growth from shrinking.

This marks the seventh consecutive month that manufacturing has contracted. The story, though, is not uniform: some indicators improved, others worsened or remained weak, and the overarching theme from survey respondents is that weak demand and tariff uncertainty continue to weigh heavily on decisions in the factory sector.

Of the five subindexes ISM tracks, production was the star in September. It jumped 3.2 points to 51.0, moving back into expansion territory. That suggests factories were still running and filling orders (perhaps from earlier demand). But the gains there were offset by weakness elsewhere.

The New Orders index retreated by 2.5 points to 48.9, signaling renewed contraction in demand. Inventory levels also declined (the Inventories index registered 47.7), hinting that firms are drawing down stocks rather than building new ones.

Employment saw slight relief: the index rose to 45.3 (from 43.8), though it remains well in contraction territory. Slower hiring, layoffs, and hiring freezes remain themes in the comments from manufacturers.

One more nuance: the Supplier Deliveries index (which is inversely interpreted) came in at 52.6, meaning deliveries were slower. In a recovering environment, slower deliveries can be a sign of rising demand; here, it may reflect continued supply chain friction or tariff-related lags.

Meanwhile, new export orders fell sharply to 43.0, down 4.6 points from August. That drop underscores that global demand is also a drag.

One recurring theme in this month’s survey responses is the influence of tariffs and trade uncertainty. Many manufacturers cited import duties, unpredictable policymaking, and supply chain disruptions as constraints when planning investment, pricing, or sourcing decisions.

S&P’s commentary suggests that the initial shock of tariffs may be moderating slightly, possibly because some suppliers are discounting to move goods ahead of new levies. But others warn of looming tariff changes (especially those enacted in August) that could push costs back upward in the coming months.

Cost pressures remain substantial. Raw materials, metals, electronic components, and labor were frequently cited as being more expensive, thanks to tariff pass-through and supply constraints. In principle, firms would like to pass those costs to customers, but weak demand limits how much they can raise selling prices, meaning margins are under pressure.

When all the pieces are laid side by side, the picture is cautious at best. While production got a boost in September, that gain was overwhelmed by declines in new orders, inventories, and export demand. So, the PMI’s slight rise feels more like treading water than a rebound.

Moreover, contraction is deepening in parts of the sector. ISM notes that in September, 28% of manufacturing GDP came from firms with a PMI at or below 45 percent (a signal of strong contraction), up from just 4 percent in August. That means more firms are feeling serious stress.

Global demand is also under strain: the sharp drop in export orders suggests U.S. firms can’t fully rely on overseas markets to offset domestic soft spots. And the tariff issue isn’t going away; if anything, it remains a looming wildcard that firms must constantly adjust to.

From a macroeconomic standpoint, manufacturing is no longer leading the U.S. outlook. The broader economy may still grow modestly (historically, manufacturing PMI readings above ~42.3% still correlate with positive GDP), but manufacturing itself, for now, remains on shaky footing.

To see if this tentative uptick has any legs, there are a few key indicators to monitor:

1. Next month’s New Orders: If this turns upward again, it could validate a turning point rather than a blip.
2. Inventories and backlog trends: If inventories stabilize or backlog climbs (without output lagging), that suggests confidence.
3. Tariff policy clarity: Any changes or surprises on tariff fronts will ripple through procurement, pricing, and investment decisions.
4. Export demand recovery: A rebound in new export orders would hint that the global side of the sector is stabilizing.
5. Input cost trends vs. pricing power: If cost pressures ease or firms regain pricing leverage, margin relief could help sustain operations through tougher periods.

September’s data offers some flickers of improvement, but the machinery of recovery hasn’t yet engaged. The manufacturing sector remains under pressure from weak demand, cost squeezes, and trade uncertainties. The question now is whether the October report will firm up momentum or confirm the sector’s continued caution.