THE DEEPER DIVE: US Manufacturing Heats up Right along with Tariff Inflation. What Does it Mean?
Everyone is pouring on the coal and running things as fast and hot as they can.
So much for recession. US manufacturing activity just soared to its highest since 2022 upon strong sales, but is this a boom or a bust? The details are an interesting tale of top-heavy tariffs and overheating prices. While the flurry of activity could mean tariffs are bringing business back to the US, it may mean something decidedly different. I’ll lay it out, and you decide. The closing point, I think, will be that it is too early to tell, but let’s dig in to see why things are getting hot because there may be some danger hidden here:
One month after unexpectedly sliding into contraction for the first time in 2025, moments ago the S&P Manufaturing PMI even more unexpectedly soared from 49.8 to 53.3 … smashing expectations of another decline … and printing well above the highest economist forecast.
So, we have two tales here, and we have to decide which tale is the trend: Last month, manufacturing wailed a dirge about sliding into recession. This time it sings a song of boom towns. It’s reasonable to ask which month is right or whether this month is just making up for last month to where the two average out flat.
According to S&P's PMI report, the surge signaled "a renewed improvement of factory business conditions after a brief deterioration in July."
Or will it equally prove to be a brief surge in August after a brief deterioration in July? This is where I say it is too early to tell. A drop into recession followed by a subsequent bounce do not make a trend, but the details may give us a hint as to what is going on here. For the moment, the headline news was great. One could hardly ask for better.
If you graph it out, services (gold line) took a minor nudge down and manufacturing bolted upward:
However, as you can see, last month, manufacturing put in a slightly lower low than it had going all the way back to the last month of last year, and this month it put in a slightly higher high than it had in the best month of this year; average the two moves out, and you’re still right in the middle of a range we have held to all year long. There is no change in trend.
Under the hood, some of the details looked really good, according to Zero Hedge:
Production rose for a third month at a pace not seen since May 2022, buoyed by the largest influx of new orders since February 2024.
Factory employment rebounded after a decline in July to register the largest payroll gain since March 2022.
Backlogs rose at an unchanged and therefore joint-steepest rate since May 2022 in the services economy
Uncompleted orders rose for a fifth consecutive month, rising in August at a pace unsurpassed since May 2022 reflecting stronger demand and near-term capacity constraints at some companies.
But there were also some details casting a little different light on this:
Inventories of inputs also rose sharply after a drop in July.
While many manufacturers reported improved sales and demand, the upturn in production and order inflows was in part linked to renewed inventory building. Stocks of finished goods rose to an extent not previously recorded since data were first available in 2007, while stocks of purchased inputs showed the second-largest rise seen for over three years.
While stock building was partly fueled by expectations of rising demand, some factories also reported increased safety-stock building amid fears of supply shortages or to protect against further price rises, in turn reflecting the recent impact of import tariffs.
It is in those details that I think we get to the bottom of what is happening here. It’s all a case of the front-running I’ve been writing about. Orders were up because retail businesses were stocking up ahead of tariffs, but production rose a lot more than orders because manufacturers were building up inventories ahead of tariffs. Yet, with all that, the manufacturers’ inventories of their “inputs”—the materials they use to make the things they make—rose even more!
What you see is everything cramming toward doing as much as possible ahead of finalized higher tariffs. All the engines are running as hot as they can to get ahead of tariffs. Everyone from retailers down to their manufacturers was pouring on the coal, hiring more people to stock up inventories throughout supply chains out of fear of shortages to come, due to tariffs, and of higher prices.
We may see more of this surging, or this may be its last hurrah, all in one month. The up and down from May to June and then June to July may be the effect of TACO tariffs constantly flashing on at very high levels and then back off again. Businesses suddenly back off when the tariffs go up, rush back in as soon as they go down, etc. So, again, we may only know as we go deeper into the year and see if the surge holds or not.
The tariff tell
The real tell is the tariff connection in the comments of manufacturers:
There were some concerns on the price side, with tariffs reported as the key driver of further cost increases in August. Companies across both manufacturing and service sectors collectively reported the steepest rise in input prices since May and the second-largest increase since January 2023.
This matches up perfectly with what we saw in the soaring PPI inflation report last week, while the rise in production matches up with what we saw in GDP, where I had forecast we’d see a rise from the previous recessionary quarter because of front-running turning on a temporary growth engine (one that borrows from future sales down the road as everyone stocks up inventory before the high prices are firmly locked in place).
Rates of increase accelerated in both sectors. While the manufacturing cost rise was especially large, being the second-steepest since August 2022, the service sector increase was the second-highest since June 2023. Average prices charged for goods and services rose at the sharpest rate since August 2022 as firms passed higher costs on to customers. Although goods price inflation cooled slightly for a second month in a row, it remained among the highest seen over the past three years. Service sector price inflation meanwhile was the sharpest since August 2022.
So a little warring up and down, but generally a lot more up than down, and the key note there is that companies did pass “higher costs on to customers.” All of this reflects those growing Producer Price Index inflation numbers I wrote about last week and says some of those higher prices by producers are now starting to flow onward to consumers, as expected … like this:
Tariffs were again widely cited as the principal cause of sharply higher costs, which in turn fed through to the steepest rise in average selling prices recorded over the past three years….
“Companies across both manufacturing and services are reporting stronger demand conditions, but are struggling to meet sales growth, causing backlogs of work to rise at a pace not seen since the pandemic-related capacity constraints recorded in early 2022. Stock building of finished goods has also risen at a survey record pace, linked in part to worries over future supply conditions."
And we know how that ended up—the highest inflation seen since the seventies and eighties, which we were still fighting at the tail end this year just before all this new inflation started crowding in. Now the threat of tariffs is spiking demand at the same time that tariffs are turning up costs in production. The spike in demand keeps the heat on as consumers are not backing down from price increases, nor are retailers, but are asking for more product to get ahead of future price increases.
“While this upturn in demand has fueled a surge in hiring, it has also bolstered firms’ pricing power. Companies have consequently passed tariff-related cost increases through to customers in increasing numbers, indicating that inflation pressures are now at their highest for three years."
It’s interesting to see all of that in an article from ZH after they spent months towing the Trump line that tariffs will never cause inflation. Guess they couldn’t have been more wrong. Thus, the …
… rise in selling prices for goods and services suggests that consumer price inflation will rise further above the Fed’s 2% target in the coming months. Indeed, combined with the upturn in business activity and hiring, the rise in prices signaled by the survey puts the PMI data more into rate hiking, rather than cutting, territory according to the historical relationship between these economic indicators and FOMC policy changes.
Ooops on ZH!
Of course, they put an INCREDIBLY STUPID PRO-TRUMP SPIN ON IT to try to save face after all their claims that tariffs would not cause inflation. This one was out-loud laughable:
In other words, the report coming unexpectedly strong, [unexpected by ZH] may be just an attempt by the traditionally anti-Trumpian S&P to pressure the Fed into maintaining a hawkish bias even as the labor market - at least as measured by most other 3rd parties - continues to deteriorate.
Yeah, sure. You expect us to believe S&P Global created all the inflation comments and data just to trick the apparently trickable Trump into backing off on pressuring the Fed to cut rates or to trick the Fed into believing in inflation by matching up to all the other recent inflation reports.
There was NOTHING here that was unexpected at The Daily Doom: Huge on-and-off tariffs spawned huge attempts by industries with huge muscles to rush ahead of those tariffs to the fullest extent they could. That includes manufacturers, service businesses, and retailers all sucking like a giant vacuum hose on their supply chains to manufacture and move inventory into place ahead of permanent and worse tariffs as quickly as possible. It’s the production side of “stocking up.” And now it is followed by all of these entities passing the huge cost of those tariffs on to their customers, including ultimately “consumers,” the end users.
All exactly on the timeframe I laid out months ago. SO, NO SUPRISE, ZH. Fully seen and expected … AND RIGHT ON TIME!
Where ZH admitted some to inflation the other day, they also put a one-and-done spin on how it would play out. As I wrote in my last Deeper Dive, tariffs are not going to have a one-time impact on inflation. One of the multiple reasons I’ve given is this:
Zero Hedge … is … claiming tariffs will not cause inflation or, seeing this report, now saying, at the very most, they will cause a one-time bump in inflation. I’ve already pointed out that it will be far from a one-time bump just because of how tariffs have been all over the place and are still being worked out from nation to nation, not so much product to product.
I’ll show very clearly further down in this article how that is already proving true in the words of companies that specialize in low prices, such as Walmart. The story of Walmart can help you do what you need to do to spare yourself some of this inflation misery. Simply do as Walmart does:
Inflation veges out but you shouldn’t …
Meanwhile, the BLS reported a 38% rise in the wholesale price of vegetables, coming soon to store shelves near you. The price increase here was said to be largely due to the impact of Trump’s ICE teams scavenging fields for migrant workers, causing vegetables to rot on the stem as I warned about due to fleeing harvesters.
This is the biggest price spike for any product category month-to-month.
“It's insane. That's why I'm growing a lot more myself this year,” said Dana Roads, who is visiting from Utah.
It is insane. It didn’t have to happen, as I wrote a month ago, because immigration enforcement on time-immediate things like crop harvesting could have been and should have been phased in; otherwise, I said, crops will rot in the fields, cows will get sick from mastitis, some will die, and we’ll have some potentially serious food shortages in the fall and winter. And here we are seeing that start to show up already!
So, your time to protect yourself as follows, using Walmart’s same approach, is starting to run out, especially when you see the price changes that follow:
(Note: Links to sources for the quotes and charts above can be found in headlines that come at the end of this article as designated by boldface type.)