U.S. manufacturing activity surged to its highest level in more than four years in July, driven by robust growth in new orders and a return to factory hiring. According to the Institute for Supply Management (ISM), the manufacturing Purchasing Managers Index (PMI) rose to 55.6 in July, up from 53.3 in June. This represents the highest reading since May 2022 and exceeded economists’ forecasts of approximately 54.0.
U.S. Manufacturing Activity Hits Four-Year High
The manufacturing sector, which comprises about 9.4% of the economy, has now expanded for seven consecutive months. The growth was supported by businesses front-loading orders to mitigate potential shortages and price hikes stemming from conflict in the Middle East. Additionally, the development of artificial intelligence has bolstered activity within the technology sector, helping to offset the impact of import tariffs.
Employment Returns to Growth
A significant milestone in the July report was the rebound in factory employment. The manufacturing employment index climbed to 52.8, the highest level since August 2022, compared to 49.7 in June. This marks the first time in 33 months that the employment measure has returned to growth territory.
The ISM reported that 60% of respondents indicated their firms were hiring, while 40% continued to manage headcounts. This increase in staffing was prompted by a surge in export orders and a buildup of unfinished work. Among the industries reporting overall growth and higher employment was the Food, Beverage & Tobacco Products sector.
Supply Chain Strains and Input Costs
Despite the headline growth, manufacturers are grappling with significant supply constraints and inflationary pressures. The supplier deliveries index rose to 58.9 from 57.4 in June, a reading above 50 that indicates slower deliveries. Supplier deliveries have now slowed for the eighth consecutive month.
Input costs remain a primary concern. The index of prices manufacturers pay for materials stood at 71.1 in July, meaning raw material prices have increased for the 22nd consecutive month. Major sources of pricing pressure include:
- Petroleum-related costs and oil price jumps tied to the Middle East conflict
- Steel and aluminum
- Tariffs
Carl Weinberg, chief economist at High Frequency Economics, stated that purchasing managers report the cost of everything entering the facility has risen since oil prices jumped in early March. Weinberg noted that manufacturing companies will pass through these increased transportation costs as quickly as possible.
Industry Performance and Outlook
Growth was widespread across the sector, with 15 industries reporting increases in July. These included machinery, transportation equipment, primary metals, appliances and components, electrical equipment, and computer and electronic products. The chemical products industry was the only sector to report a contraction.
However, sentiment among business leaders remains cautious. Susan Spence, chair of the ISM Manufacturing Business Survey Committee, noted that 62% of survey comments were negative. The most frequent concerns included pricing volatility (57%), the Iran war (43%), increasing lead times (22%), and tariffs (18%).
The broader economic context includes a decline in business inventories for five consecutive quarters. While some view low customer inventories as a positive signal for future production demand, others warn that the current boost may be temporary. Meanwhile, the Federal Reserve recently left its benchmark interest rate in the 3.50%–3.75% range, though three committee members supported a quarter-point hike due to persistent inflation risks.
Keep reading
