U.S. manufacturing activity reached a more than four-year high in July, driven by strong order growth and artificial intelligence investments. According to the Institute for Supply Management, the manufacturing PMI rose to 55.6 percent, even as Middle East conflicts strained supply chains and kept input costs elevated.
American factory activity expanded for the seventh consecutive month, climbing to its highest reading since May 2022, when it registered 55.9 percent, according to data released Aug. 3 by the Institute for Supply Management. The headline Manufacturing PMI registered 55.6 percent in July, rising 2.3 percentage points above the June figure and outperforming economist consensus forecasts that had anticipated a more modest reading of around 54 percent.
The manufacturing sector, which accounts for about 9.4% of the U.S. economy, received a substantial boost as businesses front-loaded orders to circumvent anticipated price increases and potential shortages, Reuters reported. Business inventories have declined for five straight quarters, leaving ample room for industrial expansion.
Supply Chain Pressures and the Middle East Conflict
Despite the broader economic expansion, responses in the ISM survey were overwhelmingly negative regarding supply chain stability. The U.S.-Israeli conflict with Iran emerged as a dominant theme among respondents, disrupting energy products and industrial commodities through the effective closure of critical shipping routes.
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Producers across multiple sectors reported dealing with higher costs for energy, aluminum, and fertilizers. Susan Spence, chair of the ISM Manufacturing Business Survey Committee, noted that 62 percent of survey comments were negative, while 38 percent were positive.
“Pricing volatility was mentioned in 57% of negative comments, the Iran war 43%, increasing lead times 22% and tariffs 18%,”
US Manufacturing Steady as Costs Gauge Hits Four-Year High
Susan Spence, chair of the ISM Manufacturing Business Survey Committee, via Reuters
Primary metals producers expressed severe frustration with current market conditions. One respondent told the ISM that there was no normalcy in sight in the world of metals and added that it makes me yearn for the coronavirus pandemic chaos, which was more manageable than whatever this is that we are in.
Makers of electrical equipment, appliances, and components reported that the pricing volatility and lead-time extensions in this market are arguably worse than the pandemic era, noting consistent upward trends showing no signs of slowing down. Meanwhile, chemical product manufacturers pointed to high freight costs, both for truck and ocean, while transportation equipment makers cited increased transit times for shipments rerouted away from the Red Sea, Strait of Hormuz, and Suez Canal.
Artificial Intelligence Investment and Tech Sector Demand
While traditional supply chains face severe friction, the technology sector continues to experience robust growth. An ongoing infrastructure buildout centered on artificial intelligence is driving activity and blunting the negative impact of import tariffs on industrial production.
Makers of computer and electronic products reported operating in a favorable demand environment. However, competing for scarce electronics and critical minerals due to the AI buildout also created challenges for on-time supply chain fulfillment in other manufacturing branches.
Factory Employment Rebounds and Inflationary Outlook
The surge in new orders and export volumes prompted factories to expand payrolls. The manufacturing employment measure rebounded to 52.8 percent in July, marking its highest reading since August 2022 and ending a prolonged 33-month contraction streak for the employment subindex.
Sixty percent of survey respondents reported that their firms were actively hiring, while 40 percent indicated they continued managing headcounts carefully.
Input costs remained elevated across the board. The Prices Index registered 71.1 percent, but remaining well within expansionary territory. Carl Weinberg, chief economist at High Frequency Economics, observed that transportation and material costs have risen sharply since oil prices jumped in early March.
Weinberg added that manufacturing companies will pass through those increased transportation costs as quickly as they can, just as truckers have already passed their higher costs through to manufacturers, noting that the Fed will pay attention to this. Economists surveyed by Reuters suggested that persistent inflationary pressures could prompt the Federal Reserve to consider raising interest rates as early as the following month.
Gold Market Consolidation Near Support Levels
Better-than-expected manufacturing data placed downward pressure on precious metals by granting the Federal Reserve additional leeway to address ongoing inflation risks. Despite the robust economic reports, the gold market saw little immediate reaction as prices continued consolidating near support levels.
Photo: Reuters
Spot gold last traded down 0.31% at $4,028.20 an ounce, remaining largely anchored near the $4,000 threshold as reported by Kitco News.
