US manufacturing activity reaches a four-year peak, while supply constraints are on the rise

U.S. manufacturing activity saw a greater-than-anticipated rise in May, reaching its highest point in four years. Businesses are likely accelerating their orders in response to increasing prices and shortages stemming from the conflict with Iran.

The Institute for Supply Management survey on Monday indicated that the three-month-old U.S.-Israeli war with Iran, which has effectively closed the Strait of Hormuz, is disrupting supply chains and posing a risk to the manufacturing recovery.

Businesses across various sectors, including transportation equipment and fabricated metal products, expressed concerns regarding rising prices and customers’ reluctance to make long-term financial commitments. A fragile ceasefire faced jeopardy on Monday as the United States and Iran exchanged attacks, leading to a rise in oil prices by over 3%.

The sustainability of this manufacturing growth is uncertain,” stated Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. Numerous companies are advancing orders and activities to increase inventories as a safeguard against potential supply chain disruptions. That lift is likely to be temporary, and the medium-term outlook for demand appears uncertain.

The ISM reported that its manufacturing PMI rose to 54.0 last month, marking the highest level since May 2022, up from 52.7 in April. A reading above 50 signifies growth in manufacturing, which represents 9.4% of the economy. Economists surveyed by Reuters had predicted that the PMI would increase to 53.

Manufacturing has experienced growth for five consecutive months following a period of decline due to President Donald Trump’s extensive import tariffs. It is primarily driven by a surge in artificial intelligence investments. The conflict has significantly hindered the shipping of commodities and increased the prices of goods such as energy, aluminum, and fertilizers.

Sixteen industries experienced growth last month, including textile mills, paper products, electrical equipment, appliances and components, as well as primary metals, miscellaneous manufacturing, machinery, and transportation equipment. Wood products were the sole industry indicating a contraction.

Manufacturers referenced the war in 42% of their comments. Tariffs continued to be a point of concern, noted in 18% of discussions. “Approximately 57% of those surveyed identified pricing volatility as a concern for their businesses,” stated Susan Spence, Chair of the ISM Manufacturing Business Survey Committee. She further noted that “25% of the comments were positive and 69% negative.

Some manufacturers of transportation equipment stated that the conflict in Iran is beginning to directly and adversely affect the cost of the supply chain. Makers of machinery stated that “the Middle East conflict is triggering shipment delays and uncertainties,” while others in the industry also noted an unexpected “increased demand” over the last quarter.

Manufacturers of food, beverage, and tobacco products expressed that the “cost of diesel is significantly affecting our profitability” and also highlighted the confusion “surrounding tariff refunds.” The U.S. Supreme Court in February annulled the extensive tariffs. The White House issued a response with new duties. Trump has justified the tariffs as essential for revitalizing the domestic industrial sector.

Manufacturers have reported increases in prices.

Some manufacturers of electrical equipment, appliances, and components have reported that “increased gas prices and tariffs are causing long lead constraints and price hikes that customers are not willing to bear,” while others have noted that “panic is starting within our industry.

Manufacturers of various products expressed that the “current atmosphere is characterized by significant uncertainty and apprehension regarding future price stability and long-term supply continuity.

The ISM survey’s new orders measure rose to 56.8 last month, up from 54.1 in April. There were increases in backlog orders along with exports. Despite the rise in orders, factory employment stayed low last month. The ISM’s manufacturing employment index recorded its 32nd consecutive month of contraction following an expansion in September 2023.

The supplier deliveries index remained steady at a robust level of 60.6. A reading above 50 indicates that deliveries are slowing down. Various products, such as aluminum, electrical components, electronic components, resins, semiconductors, and steel products, experienced shortages last month.

Many of these products have been in short supply for more than two months. Supply chains were already under pressure due to the tariffs imposed last year. Extended delivery times probably played a role in the increase in the PMI, as they are typically linked to a robust economy and heightened customer demand. However, delivery times are becoming longer due to tangled supply chains.

Despite the ongoing challenges in delivery performance, factory gate prices continued to increase, albeit at a slightly reduced pace last month. The survey’s prices paid for inputs decreased to a still-high 82.1 from 84.6 in April, which was the highest reading since April 2022, and fell short of forecasts for 85.0.

Sixteen industries reported higher costs for raw materials, including paper products, machinery, miscellaneous manufacturing, primary metals, and transportation equipment. No industry reported a decrease in raw material prices.

The price pressures stemming from the conflict and the surge in AI spending are extending beyond energy goods. Inflation surged at its quickest rate in three years in April, as reported by the government last week.

Soaring inflation is diminishing household purchasing power, leading financial markets to anticipate that the Federal Reserve will maintain its benchmark overnight interest rate within the 3.50%–3.75% range in the next year.

Most of the U.S. industry moves by truck, and U.S. diesel prices averaged $5.40 a gallon last week,” stated Carl Weinberg, chief economist at High Frequency Economics. Manufacturing companies will swiftly transfer those increased transportation costs, much like truckers have already done with their higher expenses to manufacturers. The Federal Reserve will take note of these developments.