Record U.S. Production is Just Tariff Front-running

Credit: ILO/Apex Image. Source.

Economists are clear: the surge in U.S. manufacturing will be short-lived.

The U.S. reported a 0.7% month-on-month increase in industrial production in February, far better than the 0.2% gain that the consensus had expected.

A prominent financial X account, Zero Hedge, declared the expected U.S. "recession cancelled " on the news that "U.S. industrial production jumps to record high."

However, Ian Shepherdson, Editor-in-Chief at Pantheon Macroeconomics, pours cold water on this assessment by saying it lacks context. "It's tariff front-running, and it won't last."

"Trade uncertainty and one-off dynamics disrupt rational efforts to make definitive takeaways," cautions Shannon Grein, Economist at Wells Fargo Economics.

Image: Pound Sterling Live. Source: Federal Reserve.

Grein says tariff front running is particularly evident in the one-off surge in vehicle manufacturing.

"An overdue bounce in auto manufacturing lifted manufacturing output by the most in a year in February. We do not see this as a sustainable driver of production and remain cautious on prospects for a continued recovery until the dust settles on trade policy," she says.

U.S. manufacturing output rose 0.9% in what amounts to the biggest sequential gain in twelve months, driven by a huge 8.5% increase in motor vehicle & parts production.

The gain snaps a run of declines recorded in the previous two months, and when measured on a year-on-year basis, auto production remains in the red.

"It's possible this pop is part of a strategy to front-run tariffs by auto manufacturers, but even so, it's unlikely to be a sustained source of activity," she explains.

Ali Jaffery, an economist at CIBC Capital Markets, says these data tell a lot about what was happening before trade tensions were ratcheted up.

"Higher import costs from tariffs, trade diversification and increased uncertainty are major near-term challenges ahead for US manufacturing," he warns.

Rising production at Boeing, following strikes by machinists, is also attributed to the uplift in manufacturing.

"We do not think today’s release is a sign of things to come," says Bradley Saunders, North America Economist at Capital Economics.

This is backed by a fall in the ISM manufacturing index in February, which was led by a sharp drop in the new orders component.

This suggests March’s data are likely to be weaker.

"With the drag from tariffs still yet to properly take effect, we believe there is downside to come for industry over the coming months," says Saunders.