Source Credit : Portfolio Prints
U.S. manufacturing activity accelerated in July, reaching its strongest level in more than four years as robust order growth fueled production and hiring. However, escalating tensions in the Middle East continued to strain global supply chains and keep input costs elevated.
According to the Institute for Supply Management (ISM), manufacturing executives remained deeply concerned about the economic fallout from the ongoing U.S.-Israeli conflict with Iran. Survey respondents frequently cited supply disruptions, price volatility, and rising transportation costs as key challenges facing the sector.
Despite these headwinds, economists welcomed the sector's resilience, particularly the return of manufacturing employment growth for the first time in nearly three years.
“What we hear from purchasing managers is that the cost of everything coming in the door has gone up since oil prices jumped in early March,” said Carl Weinberg, chief economist at High Frequency Economics. “Manufacturing companies will pass through those increased transportation costs as quickly as they can, just as truckers have already passed their higher costs on to manufacturers. The Fed will pay attention to this.”
The ISM Manufacturing PMI climbed to 55.6 in July, up from 53.3 in June and marking its highest level since May 2022. The reading also exceeded economists’ expectations of 54.0. A PMI above 50 indicates expansion in the manufacturing sector, and the index has remained in growth territory throughout the year.
Manufacturing, which accounts for roughly 9.4% of the U.S. economy, has benefited from businesses accelerating orders to avoid shortages and higher costs linked to the conflict. At the same time, massive investment in artificial intelligence infrastructure has boosted demand across the technology sector, helping offset pressure from import tariffs and geopolitical uncertainty.
With inventories remaining historically low, manufacturers still have significant room to expand production. The Federal Reserve recently reported that factory output grew at its fastest pace in four years during the second quarter, while government data showed business inventories have declined for five consecutive quarters.
Fifteen manufacturing industries reported growth in July, including electrical equipment, appliances and components, primary metals, transportation equipment, machinery, and computer and electronic products. Chemical products were the only major industry to contract during the month.
Many survey responses highlighted growing frustration over persistent market instability. One primary metals producer said there was “no normalcy in sight in the world of metals,” adding that current conditions were even more difficult to manage than the disruptions experienced during the coronavirus pandemic.
Manufacturers of electrical equipment and appliances reported that pricing volatility and extended lead times had become more severe than during the pandemic era, with costs and delivery times continuing to trend higher without signs of easing.
Chemical producers pointed to rising freight costs across both trucking and ocean shipping networks, while transportation equipment manufacturers cited longer transit times caused by rerouted shipments around conflict zones in the Red Sea, Strait of Hormuz, and Suez Canal.
Several companies also reported growing competition for electronics, semiconductors, rare earth materials, and other critical components as the global AI boom intensifies demand, creating additional challenges for supply-chain management.
Strong demand remained a key driver of activity. The ISM's new orders index rose to 56.7 from 56.0 in June, while export orders strengthened and backlogs increased, encouraging firms to expand hiring.
The manufacturing employment index climbed to 52.8, its highest level since August 2022, rebounding from 49.7 in June. According to ISM, 60% of surveyed companies reported hiring workers, while the remaining 40% said they were maintaining current staffing levels.
However, rising demand continues to collide with supply constraints. The supplier deliveries index increased to 58.9 from 57.4, indicating slower delivery times and ongoing bottlenecks across supply networks.
While slower supplier deliveries often reflect strong economic demand, they also contributed to persistent inflationary pressures within the manufacturing sector.
The ISM's prices-paid index eased slightly to 71.1 from 73.0 in June, but remained at a level consistent with significant cost inflation. The moderation likely reflected a temporary decline in oil prices during June amid a fragile ceasefire between the United States and Iran.
That relief proved short-lived. Oil prices moved higher again after the ceasefire collapsed in July, renewing concerns about energy costs and supply disruptions.
Adding to geopolitical uncertainty, Iran stated on Monday that no negotiations with the United States were currently underway and that no meetings were planned, contradicting comments from President Donald Trump, who had previously suggested talks were imminent.
The Federal Reserve last week left its benchmark interest rate unchanged at a range of 3.50% to 3.75%. However, three members of the central bank's policy-setting committee dissented, favoring a quarter-percentage-point rate increase due to persistent inflation risks.
With the Middle East conflict entering its sixth month and supply-chain pressures showing few signs of easing, economists remain concerned that inflation could stay elevated for longer than previously expected.
Manufacturers reported higher prices for a wide range of commodities, including integrated circuits, memory chips, aluminum, copper, electrical components, semiconductors, and rare-earth materials. Several of these products were also described as increasingly difficult to source.
“With demand for AI still rampant, we expect electronics prices to keep goods inflation elevated this year,” said Matthew Martin, senior U.S. economist at Oxford Economics. “Cost pressures for manufacturers will remain sticky in the near term.”
