United States manufacturing activity eased in August as new orders slowed, while manufacturers continued to warn that higher costs linked to tariffs and the Middle East conflict could weigh on sales.
The Institute for Supply Management's (ISM) manufacturing PMI fell to 54.6 in August from 55.6 in July, which was the highest reading since May 2022.
Economists had expected the index to decline to 55.2.
The PMI remained above the 50 threshold, indicating continued expansion in the manufacturing sector.
Susan Spence, MBA, Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee noted:
“In August, U.S. manufacturing activity remained in expansion territory, though it has lost ground in a number of key measures — namely, the New Orders, Backlog and Imports indexes.
"Of the five subindexes that make up the PMI®, the only one that grew faster than last month was Supplier Deliveries (up 0.4 percentage point), indicating a continuing slowdown of the supply chain."
The pullback in August may partly reflect the fading impact of businesses bringing forward orders to avoid higher prices and shortages associated with the six-month U.S.-Israeli war with Iran.
Manufacturing accounts for about 9.4% of the U.S. economy and continues to receive support from strong spending on artificial intelligence infrastructure.
The ISM survey also pointed to continued price pressures associated with the AI buildout, potentially raising concerns that inflation could become more widespread and strengthening expectations for another interest rate increase this year.
A further boost to factory activity could come from businesses replenishing inventories, which have declined for five consecutive quarters, the longest stretch since the Great Recession.
However, concerns about the inflationary impact of the war and aggressive U.S. trade policies could offset some of the expected benefits.
About 58% of comments from respondents to the ISM survey in August were negative.
Manufacturers of transportation equipment commented:
“High steel and aluminum prices (due to Section 232 tariffs) continue to make profitability a challenge. Uncertainty over the U.S.-Mexico-Canada Agreement is at the forefront of many customer conversations.
"Our industry has also been hit with countervailing and anti-dumping penalties, further raising the cost of equipment.”
Some chemical manufacturers said: “The economy is annoying; it is getting in the way of otherwise good business. We are making great new products but struggling to compete when prices escalate due to things like tariffs and the conflict in the Strait of Hormuz.
"I fear that the inflation caused by these factors will lead to lower sales and lower spending power of our customers. Call it inflation!
"At some point, it leads to an economic downturn or at least an economic pain for many consumers. It’s an uncertain year, our second in a row.”
