US manufacturing activity hits more than four-year high; input prices elevated

U.S. Manufacturing activity climbed to its highest level in more than four years during July, driven by robust order growth and a notable expansion in factory employment. According to Finance reporting on the ISM survey, the headline purchasing managers' index increased to 55.6 last month from 53.3 in June. This marked the strongest reading since May 2022, easily surpassing forecasts by economists polled by Reuters who had expected a more modest edge upward. The sector, which represents roughly 9.4% of the economy, continues to hold above the 50 threshold that denotes growth, bolstered by businesses front-loading orders to preempt price hikes and shortages stemming from the war.

At the same time, international manufacturing metrics revealed contrasting regional trajectories. As detailed in Analytics Insight coverage of the S&P Global HSBC India Manufacturing PMI, India’s factory sector expanded at its slowest pace in nearly five years, dropping to 53.5 from 54.2 in June. While the Indian index remained above the critical 50 threshold to signal continued growth, it marked the lowest reading since August 2021. The slowdown in India was attributed to weakening domestic demand and slower local orders, even as overseas sales rebounded across several global markets.

Media additions

Back in the United States, the positive headline data masked deep underlying anxieties among purchasing managers. Responses within the Institute for Supply Management survey were overwhelmingly negative, with the U.S.-Israeli war with Iran dominating commentary. Price volatility and supply chain strain emerged as central concerns for domestic producers. As noted in the Finance report, the Fed last week left its benchmark overnight interest rate in the 3.50%-3.75% range, though three members of the U.S. Central bank's policy-setting committee dissented, preferring a quarter-percentage-point hike because inflation risks are tilted to the upside.

"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,"

Carl Weinberg, chief economist at High Frequency Economics, via Finance

Weinberg added that manufacturing companies would pass through those increased transportation costs as quickly as they can, noting that the Fed will pay attention to this. Input cost pressures remained elevated despite a slight dip in the ISM's prices paid index to 71.1 from 73.0 in June, a reading reflecting a retreat in oil prices in June amid a shaky ceasefire between the U.S. And Iran that rose following the collapse of the truce in July. Furthermore, an artificial intelligence buildout is also driving activity in the technology sector, creating scarcity in critical components like aluminum, copper, electrical components, rare earth components and semiconductors, which has complicated on-time fulfillment for our supply chains.

The human and operational toll on U.S. Factories was apparent in survey responses. Susan Spence, the chair of the ISM Manufacturing Business Survey Committee, reported that 62% of the comments in last month's survey were negative and 38% were positive, citing pricing volatility, the Iran war, increasing lead times and tariffs. Primary metals producers expressed acute frustration, with one respondent complaining there was "no normalcy in sight in the world of metals," adding that "it makes me yearn for the coronavirus pandemic chaos, which was more manageable than whatever this is that we are in." Despite these severe operational headwinds, the improvement in activity, especially the return to growth in manufacturing employment for the first time in 33 months, was cheered by economists, with the employment measure rebounding to 52.8.

The international picture offered a different dynamic. In India, while domestic orders softened, export growth improved at its fastest pace since April, driven by stronger demand from countries including Canada, Egypt, Indonesia, Kenya, Nepal, South Africa, Thailand, and the United Arab Emirates. Pranjul Bhandari, chief India economist at HSBC, observed that supply chain delays were continuing to unwind, though renewed Middle East tensions cast doubt on the durability of those improvements. Input cost inflation in India slowed to a five-month low, allowing manufacturers to pass on limited cost increases while protecting margins amid strong competition.

Key Metrics and Sector Trends

• U.S. Manufacturing PMI: Rose to 55.6 in July, the highest reading since May 2022.
• U.S. Factory Employment: Rebounded to 52.8, marking the first return to job growth in 33 months.
• U.S. Prices Paid Index: Slipped to 71.1 from 73.0, maintaining high input cost pressures.
• India Manufacturing PMI: Fell to 53.5, reaching its lowest level since August 2021 amid slower local demand.

Economists remain divided on whether persistent cost pressures will force aggressive monetary tightening, even as businesses attempt to navigate complex supply chains and volatile commodity markets.