The U.S. manufacturing sector expanded at its fastest pace in more than four years in July, with factory activity reaching a 55.6 reading on the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI). This marked the seventh consecutive month of growth and the highest level since May 2022, according to data released by ISM.
Factory employment returned to growth for the first time since January 2024, while new orders and production also accelerated. The report highlighted strong gains in output, which rose at the fastest pace since November 2021, and a solid increase in new export orders. Only one of the 16 tracked manufacturing industries—chemical products—reported contraction.
Key Drivers Behind the Expansion
The surge in manufacturing activity was attributed to several factors, including businesses front-loading orders to mitigate supply chain risks and investments in artificial intelligence-related infrastructure. The ISM survey noted that AI-driven demand for semiconductors, power equipment, and networking components contributed to the sector’s growth. Additionally, changes to tax policies in 2024, which allowed businesses to expense capital investments immediately, provided further stimulus.
The employment gauge rose to a four-year high, signaling renewed hiring in the sector. Analysts suggested this could reflect a long-awaited reshoring trend, with companies bringing production back to the U.S. to reduce reliance on foreign supply chains. Jeffrey Roach, chief economist at LPL Financial, stated that the data may indicate a “renaissance” in manufacturing jobs, driven by efforts to reshore production.
Persistent Inflation Pressures and Geopolitical Risks
Despite the positive headline figures, price pressures remained elevated, with the ISM’s prices index holding at 71.1—the 22nd consecutive month above 50, indicating rising costs. Executives in industries such as primary metals and electrical equipment described the volatility in pricing and lead times as worse than during the COVID-19 pandemic, citing ongoing geopolitical tensions, particularly in the Middle East, as a major disruptor.
A manager in the electrical equipment sector told ISM that the current environment was “no normalcy in sight”, with disruptions from the Iran conflict and tariffs creating persistent uncertainty. The report noted that nearly three-quarters of respondents reported higher prices, underscoring concerns about inflationary pressures persisting into the second half of the year.
Policy and Economic Context
The manufacturing rebound coincides with tariffs implemented under the Trump administration, which have encouraged businesses to prioritize domestic production over offshoring. The ISM survey also referenced strong demand for AI-related manufacturing, as companies ramp up production for data center infrastructure.
While the overall outlook was positive, the report cautioned that ongoing geopolitical instability—including the fluctuating conflict between the U.S. and Iran—could continue to disrupt supply chains and pricing. The chemical products sector, which includes fuel production, was the sole industry in contraction, likely due to declining gasoline prices.
Industry Breakdown and Growth Sectors
Fifteen of the 16 manufacturing industries tracked by ISM reported growth in July. Leading sectors included:
- Appliances and components
- Electrical equipment
- Computer and electronic products
- Machinery
The machinery sector, in particular, saw robust demand tied to AI infrastructure buildout, with one manufacturer noting that “products going into data centers are at full procurement and manufacturing ramp-up.”
Outlook and Uncertainties
Economists and industry leaders offered mixed assessments of the manufacturing sector’s trajectory. While the strong PMI reading and job growth were seen as positive signs, concerns about inflation, geopolitical risks, and supply chain fragility tempered optimism. The ISM report suggested that the sector’s resilience would depend on whether price pressures could stabilize and whether geopolitical tensions eased in the coming months.