Manufacturing, Jobs and Inflation on the Rise Amid Trump Tariff Standoffs

We are seeing some relief in the market following delayed Trump tariffs on Mexico by one month. However, we are reading reports that things may not unfold the same way when President Trump speaks with Canada’s Prime Minister Trudeau at 3 p.m. ET on Monday.

While the market trades higher following a better-than-feared outcome with Mexico, we will continue to hold our newly-added inverse ETFs at least until we have a clearer sense of the tariff situation with Canada, China and the European Union. To be clear, those positions are tactical ones that aim at protecting the Portfolio and the plan is to remove them when that job is completed so we don’t risk them becoming a meaningful drag on the Portfolio.

Now, let’s turn to Monday morning's economic data, which showed a pick-up in manufacturing activity and the domestic jobs market but also inflation. It also showed a pick-up in December construction spending.

ISM’s January Manufacturing Index

The headline figure for ISM’s January Manufacturing Index came in at 50.9 compared to December’s 49.2 figure and the market consensus forecast of 49.8 for January. Crossing the expansion-contraction line of 50 means that part of the economy was growing again in January after contracting over the last year. New order activity also strengthened, registering 55.1 on the scale, its best reading in the last several months. Paired with the growth readings for November and December orders imply, subject to tariff disruptions, manufacturing activity continue to expand in February.

ISM’s data also pointed to job growth in the manufacturing sector, something we haven’t seen in a while. That should be a positive force in ADP’s January Employment Report on Wednesday and the January Employment Report on Friday. As we get ready for Friday’s report, we’ll want to dig into not only ADP’s findings on Wednesday but also ISM’s January Service PMI which is also out that day.

So far, the January ISM Manufacturing PMI data has been favorable for the economy, pointing to it continuing to hum. The fly in the January Manufacturing PMI ointment was what the Pricing data showed for inflation. The Pricing sub-index not only rebounded to 54.9, up from 52.5 in December and 50.3 in November, it surpassed October’s 54.8 figure. Another data point that suggests inflation pressures are not cooperating.

We saw the same in this morning’s final January Manufacturing PMI report from S&P Global:

"Firms were also faced with a further sharp increase in the cost of inputs, with the pace of inflation unchanged from December. Manufacturers therefore raised their own selling prices at a marked pace. The rate of factory gate price inflation quickened for the third month running to the fastest since March 2024."

Recognizing the Services economy accounts for a much larger percentage of the U.S. economy, we’ll be interested in what the January Service PMI reports from ISM and S&P Global have to say on job creation and inflation on Wednesday. If the findings are similar, it will be more evidence, subject to the impact of tariffs, the U.S. economy does not require the assistance of a rate cut and we have much longer for inflation to return to the Fed’s 2% target.

Thinking out loud, should the collection of wage data found in ADP’s report on Wednesday point to real wage growth continuing and favorable job gains, we would view that positively for consumer spending, a key part of the economy.

December Construction Spending

The Commerce Department reported construction spending rose 0.5% in December following an upwardly-revised 0.2% increase in November and outperformed the 0.1% market consensus for December. Those are the sequential figures, and the year-over-year look shows December construction spending climbed 4.3% spurred on by continued strength in public non-residential construction (+4.1%) and public housing (12.0%) offset by a modest decline in private residential construction.

We see the figures speaking to the bullish non-residential construction comments we shared Friday when we dug into Eaton’s ETN quarterly results. Those comments support not only our position in ETN shares, but also those in United Rentals URI and Vulcan Materials VMC, and to a lesser extent, Waste Management WM.

Looking forward, we will want to see how things play out between Trump and Trudeau on the topic of tariffs. Should we see Trump proceed with tariffs on Canada, the larger impact would be on the housing market, which doesn’t have the support of infrastructure spending or data center demand.

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At the time of publication, TheStreet Pro Portfolio was long ETN, URI, VMC and WM.