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Federal Reserve Says A Slow In Manufacturing Is 1 Reason It Cut Interest Rates


President Trump is threatening to add tariffs to almost everything the U.S. buys from China. He says the new tariffs will take effect a month from now.


PRESIDENT DONALD TRUMP: We have another meeting in early September. I said, that's fine. But in the meantime - until such time as there's a deal, we'll be taxing them.

SHAPIRO: The tariffs would raise prices on consumer items, which have been largely shielded from Trump's protectionist measures up until now. And that's adding to an uncertain business climate, which is already taking a toll on manufacturing, as NPR's Scott Horsley reports.

SCOTT HORSLEY, BYLINE: Manufacturing in the U.S. is still growing - but just barely. New numbers out today show production and hiring in factories slowed last month. Factory activity actually contracted in Wisconsin and Illinois.

BJ PARROTT: It's not been real wonderful. It was very brisk this first quarter of the year. But I think, generally, we're seeing somewhat of a slowdown.

HORSLEY: B.J. Parrott runs Milwaukee Metal Products, a family-owned company that's been in business for 111 years.

PARROTT: Started in 1908 by my grandfather, we are a fabricated metal company. We make primarily things for other manufacturing type customers.

HORSLEY: Parrott's been watching the U.S.-China trade war closely. Earlier this year, when it looked as if the two countries might make a deal, she felt more optimistic. But now she's not so sure.

PARROTT: As the trade deals have been falling apart, things have gotten a little bit less certain. And when there's less certainty, it's harder to predict what's going on.

HORSLEY: That uncertainty was one of the factors the Federal Reserve cited this week in its decision to cut interest rates. Fed Chairman Jerome Powell says, while the tariffs imposed by the Trump administration are not a huge cost on the economy by themselves, they do take a toll on business confidence.


JEROME POWELL: Businesses will tell you that it's a factor. Particularly, manufacturing businesses that have supply chains that cross international borders will all tell you that it's been a challenge. Many of them have made adjustments, and they've gotten to a place where it's OK. But it's been a challenge.

HORSLEY: Parrott, for example, saw a big increase last year in aluminum prices as a result of the president's tariffs. She says those costs have remained high even as the government has lifted taxes on some exporting countries, like Canada.

PARROTT: It stopped going up, but it hasn't come down. So we're still paying significantly higher prices for our raw material than we were two years ago.

HORSLEY: Parrott tries to pass those higher costs on to her customers. But as a result, she sometimes loses business to foreign competitors who don't have to pay the tariffs. The trade war is also affecting Parrott's customers. One of her company's signature products is a machine that crushes 55-gallon drums - so they take up less space in a landfill, for example. Parrott says some customers are reluctant to make a big investment like that in today's uncertain environment.

PARROTT: There's a lot of companies, especially if they have existing equipment, that are continuing to use their existing equipment rather than replacing or upgrading it because they just don't know what's going to happen.

HORSLEY: President Trump's former economic adviser Gary Cohn told the BBC, you're now seeing a split in the U.S. economy - between the large services sector, which is largely unscathed by the president's trade war, and the manufacturing industry, which is paying a price.


GARY COHN: In the capital investment part of the U.S. economy, it's having a dramatic impact.

HORSLEY: That'll be something to watch for tomorrow when the Labor Department issues its monthly jobs report. The U.S. economy continues to add jobs at a healthy pace, but not as many as this time last year. And while manufacturing is a relatively small slice of the U.S. economy, factories account for fully a quarter of the overall jobs slowdown.

Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.