U.S. manufacturing activity continued its downward slide in July, with persistent tariff-related cost pressures forcing firms to reassess sourcing strategies and slow hiring. While backlogs and new orders hint at a possible rebound, outlooks remain cautious as trade policy hardens into permanence.
Manufacturers Brace for Tariff Normalization
The Institute for Supply Management’s July PMI dropped to 48%, marking the second straight month of accelerated contraction and signaling a broader recalibration within the manufacturing sector. Companies are increasingly shifting from temporary workarounds to long-term adjustments, with ISM CEO Thomas Derry stating that tariffs have become a structural factor in cost and sourcing decisions.
“Tariffs have companies questioning their sourcing strategies, questioning the opportunities for reshoring or nearshoring,” Derry said on a recent call with analysts. Although production ticked up to 51.4%, the rise was interpreted as price-driven rather than demand-led.
Supplier delivery times shortened, reflected in the drop of the supplier deliveries index to 49.3% from 54.2%. as weaker demand conditions allowed for smoother logistics flows. Employment, however, remained under pressure, falling to 43.4% as manufacturers held back on hiring despite a modest uptick in output.
S&P Global’s separate July PMI report corroborated ISM’s findings, recording a 49.8% reading. S&P’s Chris Williamson noted that while price increases peaked in June, optimism had faded as factories reported lower export demand and trimmed headcounts in response to rising input costs.
Order Backlogs Offer Glimmer of Stabilization
Despite macro headwinds, ISM noted slight gains in new orders and backlogs, up to 47.1% and 46.8%, respectively, which some manufacturers see as an early signal of replenishment cycles restarting. “People will go back to their supply base to rebuild those inventories,” said Derry, pointing to tariff-driven stockpiling earlier this year that had left inventories depleted.
What’s different this time, Derry suggested, is that firms may begin to accept tariffs not as a disruption but as a baseline operating constraint. That mindset shift, coupled with a clearer sense of trade policy direction under the Trump administration, could provide the stability needed to make longer-term sourcing and investment decisions.
Some manufacturers, particularly in sectors with concentrated overseas input reliance, are now leaning into tariff forecasting as a planning function, embedding it into procurement frameworks and adjusting landed cost models accordingly.
Rethinking Resilience in a Tariff-Laden World
While many have framed tariff exposure as a drag on growth, a number of global manufacturers are treating it as a forcing mechanism for supply chain evolution. According to recent trade reports, firms that began diversifying supplier bases during previous trade cycles are now better positioned to handle price volatility. Rather than wait for policy reversal, the emerging approach is pragmatic: treat trade frictions as durable and adapt network design, cost models, and inventory policy around them.