Factory Activity Beats Expectations
U.S. manufacturing activity increased more than expected in May, reaching its highest level in four years as companies rushed to place orders amid rising prices, shortages and disruptions linked to the war with Iran.
The Institute for Supply Management said its manufacturing PMI rose to 54.0 in May, up from 52.7 in April. A reading above 50 signals expansion in the manufacturing sector, which accounts for 9.4% of the U.S. economy.
Supply Chains Face Fresh Pressure
The data suggests that the three-month-old U.S.-Israeli war with Iran is fracturing supply chains and threatening to undermine the manufacturing recovery.
The near closure of the Strait of Hormuz has disrupted shipments of energy, commodities and industrial inputs, pushing up costs for manufacturers already dealing with the effects of earlier tariffs.
Front-Loaded Orders May Be Temporary
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, warned that the durability of the manufacturing rebound remains uncertain.
He said many companies are bringing forward orders and building inventories to protect themselves against supply chain disruptions. That could lift activity in the short term, but may not reflect stronger underlying demand.
Sixteen Industries Report Growth
Sixteen manufacturing industries reported growth in May, including textile mills, paper products, electrical equipment, appliances and components, primary metals, machinery and transportation equipment.
Wood products was the only industry to report contraction, showing that the expansion was broad despite rising cost pressures and ongoing uncertainty.
War And Tariffs Dominate Company Comments
The war was mentioned in 42% of comments from manufacturers, while tariffs were mentioned in 18%.
Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said 57% of respondents cited pricing volatility as an issue. Only 25% of comments were positive, while 69% were negative.
Manufacturers Report Cost Shock
Transportation equipment manufacturers said the Iran conflict is directly and negatively affecting supply chain costs.
Machinery makers said the Middle East conflict is triggering shipment delays and uncertainty, although some also reported unexpected increases in demand over the past quarter.
Fuel Costs Hit Profitability
Food, beverage and tobacco manufacturers said diesel costs are having a major impact on profitability.
Some also pointed to confusion around tariff refunds after the U.S. Supreme Court struck down broad tariffs in February and the White House responded with new duties. President Donald Trump has defended tariffs as necessary to revive domestic manufacturing.
Orders Rise But Hiring Stays Weak
The ISM survey’s new orders index rose to 56.8 in May from 54.1 in April. Backlog orders and exports also increased.
Despite the rise in orders, factory employment remained weak. The ISM manufacturing employment index posted its 32nd consecutive month of contraction after briefly expanding in September 2023.
Deliveries Slow As Shortages Persist
The supplier deliveries index remained elevated at 60.6, indicating slower deliveries. Longer delivery times usually signal strong demand, but in this case they also reflect supply chain disruptions.
Aluminum, electrical components, electronic components, resins, semiconductors and steel products were all reported in short supply. Many of these materials have been scarce for more than two months.
Factory Prices Remain High
Input costs continued to rise, though slightly more slowly than in April. The prices paid index eased to 82.1 from 84.6, still a very high level.
Sixteen industries reported paying higher prices for raw materials, and no industry reported a decline. Price pressure is now spreading beyond energy into transportation, metals, components and other industrial inputs.
Inflation Keeps Fed On Alert
The conflict, higher fuel costs and the artificial intelligence spending boom are feeding into broader inflation pressure. Inflation rose at its fastest pace in three years in April, according to government data released last week.
With diesel prices averaging $5.40 a gallon, manufacturers are likely to pass higher transportation costs on to customers. That keeps the Federal Reserve focused on inflation and supports expectations that interest rates may stay elevated into next year.
