REAL ECONOMY BLOG | June 02, 2025

The impact of tariffs on manufacturing activity was in full force in May, according to business executives surveyed by the Institute for Supply Management, as falling demand and rising prices occurred simultaneously.

The institute’s purchasing managers’ index, released on Monday, fell to 48.5 in May, down from April’s reading of 48.7, suggesting continued contraction. Readings below 50 indicate contraction.

The data suggests that inflation will increase in the coming months—something we haven’t observed in the past two months, likely because businesses were able to absorb tariff costs through existing inventories and margin compression.

In principle, the prices of goods, especially durable goods, are often sticky in the short run. But when businesses face significant macroeconomic pressures like tariffs, price adjustments tend to happen much more quickly.

In the meantime, slowing activity means businesses are not increasing their hiring, with the employment subindex indicating contraction for the fourth consecutive month.

If anything, this subindex suggests another month of declining manufacturing job gains when May’s job report is released on Friday.

In a separate report Monday, construction spending fell in April for the third consecutive month. This is also a clear sign that tariffs—and the expectation of additional tariffs—have led firms to scrap expansion plans, particularly investments in new construction like factories or warehouses.

While our estimate puts the probability of a recession below 50%, recent data continues to suggest that the economy is headed for a slow second quarter because of the constantly shifting tariff landscape.