U.S. manufacturing activity reaches four-year high in July

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U.S. manufacturing four-year high

Highlights

The ISM manufacturing PMI jumps to 55.6 in July from 53.3 in June, surpassing expectations and reaching its highest since May 2022.
Strong demand, low inventories, rising new orders (56.7), and backlogs push factory hiring higher, with the employment index at 52.8, a near two-year high.
Supplier deliveries index rises to 58.9, signaling worsening supply constraints and cost pressures, while the prices paid index eases to 71.1 amid renewed upside inflation risks.

July PMI growth and demand trends

As reported by Reuters, citing the Institute for Supply Management, its manufacturing PMI rises to 55.6 in July from 53.3 in June, the highest reading since May 2022 and above economists' forecast of 54.0 in a Reuters poll.

The index remains above the 50 threshold throughout this year, signaling continued expansion in manufacturing. The sector, which accounts for about 9.4% of the economy, benefits from businesses front-loading orders to avoid higher prices and shortages linked to the U.S.-Israeli war with Iran, while artificial intelligence investment also supports technology-related factory activity.

With business inventories still very low, manufacturers have room to keep expanding. The Federal Reserve reports last month that factory production grows in the second quarter at its fastest pace in four years.

The ISM survey's measure of new orders rises to 56.7 in July from 56.0 in June. Export orders surge and backlogs accumulate, prompting factories to increase hiring, with the employment index rebounding to 52.8 from 49.7, its highest level since August 2022.

Supply constraints and inflation risks

Strong demand is also colliding with supply constraints, adding pressure to delivery times and production costs. The supplier deliveries index increases to 58.9 from 57.4 in June, and a reading above 50 indicates slower deliveries.

Longer delivery times likely contribute to the jump in the PMI because they are usually associated with strong demand and a solid economy. At the same time, inflation at the factory gate remains elevated, though the pace of increase eases, with the prices paid index slipping to 71.1 from 73.0 in June.

The moderation in input prices may reflect lower oil prices in June during a shaky ceasefire between the U.S. and Iran. Oil prices have since risen after that truce collapses in July, leaving inflation risks tilted to the upside as the war enters its sixth month.

The Federal Reserve leaves its benchmark overnight interest rate last week in the 3.50% to 3.75% range. Three members of the U.S. central bank's policy-setting committee dissent, favoring a quarter-percentage-point rate hike.

In our earlier article on the Strait of Hormuz disruption and war-driven oil rally, we explained how supply risks from the U.S.–Iran conflict pushed crude prices sharply higher and lifted expected Q2 profits for U.S. shale producers and oil majors. We also noted that, despite the windfall, many companies were likely to prioritize dividends, buybacks, and balance-sheet strength rather than significantly expanding drilling.

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