Federal Reserve: Tariffs increase uncertainty for US manufacturers

November 27, 2018 - The United States economy is humming along nicely, and manufacturing demand remains strong, thanks to positive economic fundamentals. Manufacturers are reporting, according to a Federal Reserve report on 2018’s third quarter, “moderate output growth,” but the same report raised warnings on potential difficulties on the horizon, including rising materials costs and uncertainties over the trade environment.

The so-called Fed “Beige Book,” released in late October, reports on the U.S. economy from the perspective of the Federal Reserve in Washington and its twelve district offices around the country.

Many manufacturers, according to the report, attribute higher input costs to the tariffs that President Donald Trump imposed on many imports, a policy which also indirectly contributed to anomalies in the global market for alumina, an aluminum precursor. Higher prices for manufacturing inputs led to increased prices for finished goods, which, combined with labor shortages and rising wages, conjures the specter of potential higher future inflation. The report describes a mood of uncertainty that hovers over an otherwise upbeat environment for manufacturers.

In the nation’s industrial heartland, the Fed office in Cleveland, which covers Ohio and parts of Pennsylvania, Kentucky, and West Virginia, noted that “upward pressure on input costs was strong, notably for metals, construction materials, and fuel. Final selling prices increased as manufacturers, builders, and transportation firms raised their prices to cover their increased input costs.”

The majority of the Cleveland Fed’s contacts in the construction industry “attributed at least some of these increases to import tariffs. One trucking contact noted that prices for pallet jacks, tires, and packaging material were higher because of the tariffs.” Tariff-related gaps in supply chains have caused “mismatches in inventories,” the Cleveland Fed reported, and two-thirds of manufacturers raised their prices during the quarter.

The Fed’s Chicago office, which covers Iowa and parts of Illinois, Indiana, Wisconsin, and Michigan, reported that some manufacturers “indicated that inventories were too low as a result of longer lead times for materials.” Among manufacturers who have reacted to tariffs, “more said that they were slowing spending than increasing it.” Some manufacturers “indicated that they were delaying capital spending decisions until the outcomes of trade negotiations were more clear.”

The Dallas office, which covers Texas, northern Louisiana, and southern New Mexico, reported that 60 percent of manufacturers said the tariffs implemented and announced this year “have resulted in increased input costs,” and several reported lower profit margins because they were unable to raise prices enough to cover cost increases.

Robust manufacturing growth continued in the Fed’s 11th district, although there were some signs that the expansion is moderating. A Dallas Fed survey conducted in September showed that half of Texas manufacturing executives felt the impact of tariffs on their companies is negative, versus nine percent who said it is positive.

“The most common tariff effects were increased uncertainty, rising costs, longer supplier delivery times, and reduced production,” the report concluded. “Even still, manufacturers reported positive business conditions overall, and outlooks remained optimistic.”

Source: American Journal of Transportation