When it comes to observing economic and financial market volatility and uncertainty, April was as complete of a month as we’ve seen in years. President Trump’s actions and statements to date, as well as the advance notice on Liberation Day, have not only put the markets on notice but the economy as well.
We found out that first-quarter U.S. GDP shrank for the first time in two years, almost entirely due to the widening of the trade balance as businesses and consumers front-loaded their spending ahead of tariff implementations. Job market data continued to come in mixed, inflation data generally came in weaker than expected, and sentiment continued to decline as economic uncertainty spiked.
Exhibit 1: Manufacturing Remains in Recession
Source: ICG Advisors, U.S. Department of Commerce, Bloomberg.
The one area that was impacted by both weaker sentiment and actual activity was manufacturing. We have written about the state of U.S. manufacturing several times over the past year, and while we’ve preferred to see the glass as half full—with some glimmer of hope seen in Fall/Winter 2024—that light at the end of the tunnel remains distant. Our Regional Fed Manufacturing Index (made up of sentiment reports from the New York, Richmond, Kansas City, and Dallas Federal Reserve Banks) deteriorated significantly in April. It’s now at its lowest level since July of last year and firmly in negative territory. This implies much weaker orders for manufactured goods in the coming months, especially outside of Transportation and Defense (Exhibit 1).
Manufacturing remains high on the Trump Administration’s list of priorities, with a clear desire to increase output in the sector. The strategy chosen by the administration has been to increase tariffs and trade restrictions—an approach that contrasts with the prior administration’s focus on subsidies and tax breaks. However, both strategies fail to address the significant headwinds facing the sector: the high cost of capital, lack of available skilled labor, lack of global competitiveness among domestic producers, inadequate infrastructure (including necessary supply chains), and the much higher operating costs faced by those seeking to produce in the United States.
Given the on-again, off-again nature of tariff announcements and the lack of clarity in trade negotiations, it is highly doubtful that business and consumer sentiment will improve meaningfully over the coming months. In fact, recent announcements regarding China may worsen the situation, as companies become more focused on inventory management rather than capital investment—thereby delaying meaningful investment in manufactured goods.
We remain open to changing our minds when the facts on the ground change, but as of now, the possibility of a manufacturing rebound during 2025 seems highly doubtful.
As always, stay tuned.
Ardavan Mobasheri
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