US manufacturing activity reached its highest level in more than four years in July, driven by stronger orders, rising factory employment, and resilient demand. According to the Institute for Supply Management (ISM), the manufacturing PMI rose to 55.6 in July from 53.3 in June, reaching its highest level since May 2022 and exceeding economists' expectations of around 54.0. This performance represents the seventh straight month of expansion, with the PMI remaining above the 50-point threshold that indicates growth in manufacturing. The Federal Reserve also reported that manufacturing output at factories grew at its fastest pace in four years in the second quarter, while business inventories have declined for five consecutive quarters, prompting manufacturers to step up activity and signaling rising demand. As reported by ISM, businesses are front-loading orders to avoid higher prices and shortages stemming from the ongoing Middle East conflict, with the ISM survey's new orders measure rising to 56.7 from 56.0 in June.
The most significant development was the Employment Index reaching 52.8 percent, up 3.1 percentage points from June's 49.7 percent, marking the first time employment has been in expansion territory in 33 months. The manufacturing employment index rebounded to 52.8, its highest level since August 2022, with the ISM survey's new orders measure rising to 56.7 from 56.0 in June. As reported by ISM Chair Susan Spence, this shift represents a turnaround from the previous four straight months of contraction in employment. Sixty percent of respondents reported their firms were hiring, while 40% indicated they continued to manage headcounts, according to the ISM. The Backlog of Orders Index registered 55 percent, up 4.5 percentage points from June's 50.5 percent, indicating strong demand conditions across manufacturing sectors. Export orders surged while backlogs prompted employers to expand their workforce, with the manufacturing employment index rising to 52.8, its highest level since August 2022.
The US manufacturing acceleration is part of a broadening global goods cycle, with Japan's manufacturing output growing at its fastest pace in almost twelve and a half years and the Eurozone returning to broad-based growth led by its laggards. According to Investing.com, Japan's new orders are at their steepest in four and a half years on AI-related demand, while the Eurozone composite rose to 52.0 from 50.0, the fastest in eight months, with Germany back above 50. The global manufacturing PMI printed 52.1, a four-month low but an eighth month above 50, with Taiwan at 55.1, Korea at 53.1, and Vietnam at 52.9 confirming the export channel is open. However, China diverges with the official NBS index falling 1.1 points to 49.2, a second month of contraction, while the private RatingDog survey held at 50.9 but hit a four-month low, with private exporters remaining in the global cycle but the domestic industrial base not participating.
Despite strong manufacturing growth, price pressures remain elevated with the Prices Index at 71.1 percent, down 1.9 percentage points from June's 73 percent but still indicating significant inflationary pressures. According to ISM respondents, electrical components and electronic components have been in short supply for 13 and 17 months respectively, contributing to price increases. The Supplier Deliveries Index rose to 58.9 from 57.4 in June, indicating slower deliveries due to increased order volumes and pressure on supply chains. As reported by Reuters, makers of chemical products complained about "high freight costs, both for truck and ocean," adding that "longer lead times are concerning." Some manufacturers of transportation equipment reported increased costs and transit time "for rerouted shipments due to conflicts in the Red Sea, Strait of Hormuz and Suez Canal." The lengthening in suppliers' delivery times likely contributed to the jump in the PMI last month, as it is normally associated with a strong economy and high demand. Supply constraints meant inflation at the factory gate remained elevated last month, though the pace of increase slowed. The survey's gauge of prices paid for inputs slipped to a still-high 71.1 from 73.0 in June, which could reflect a retreat in oil prices in June amid a shaky ceasefire between the U.S. and Iran, though oil prices have since risen following the collapse of the truce in July.
The manufacturing surge is being driven by strong demand in semiconductor, AI, advanced packaging, and high-performance computing markets. As reported by ISM respondents, defense demand continues at all-time highs with most product orders going to semiconductor and defense industries. Companies are experiencing full procurement and manufacturing ramp-up for products going into data centers as AI infrastructure buildout approaches real activation. However, this boom is creating supply chain constraints as manufacturers compete for scarce electronics, critical minerals, and other materials, challenging on-time fulfillment and creating competing for scarce supply scenarios. The development of artificial intelligence is also boosting activity in the technology sector and mitigating the impact of import tariffs on manufacturing. With business inventories at very low levels, there is ample room for manufacturing to expand. The artificial intelligence buildout is also driving activity in the technology sector, blunting the hit on manufacturing from import tariffs.
