US manufacturing gathered further momentum in July, with the ISM Manufacturing PMI rising to 55.6 from 53.3, its highest reading since May 2022 and well above market expectations. According to ISM, the latest reading is historically consistent with annualized real GDP growth of around 2.8%, reinforcing signs that the US economy entered the third quarter on a solid footing despite elevated interest rates and geopolitical uncertainty.
The improvement was broad-based, led by a sharp acceleration in production. The Production Index jumped 6.3 points to 58.5, its highest level in almost five years, extending expansion to a ninth consecutive month. The labor market also showed renewed strength, with the Employment Index climbing to 52.8 from 49.7, returning to expansion territory for the first time in 33 months and reaching its highest level since August 2022. Together with stronger new orders and export demand, the survey points to improving manufacturing activity rather than a temporary rebound.
Inflation pressures, however, remained an important feature of the report. Although the Prices Index eased to 71.1 from 73.0, it remained firmly elevated. ISM said price increases continued to be driven by higher steel and aluminum costs, tariffs on imported goods and rising petroleum-based product prices linked to the Middle East conflict. Just over half of respondents reported paying higher prices in July, down from June but still indicative of widespread cost pressures across the manufacturing sector.
The report strengthens the case that the US economy remains resilient while inflation risks have yet to disappear. For the Federal Reserve, the combination of stronger production, expanding employment and still-elevated input prices leaves the door open to another rate hike should inflation remain stubborn.
Economic Data
| Indicator | Actual | Expected | Previous |
|---|---|---|---|
| ISM Manufacturing PMI | 55.6 | 54.0 | 53.3 |
| S&P Global Manufacturing PMI | 53.9 | 53.8 | 53.8 |
| Production | 58.5 | — | 52.2 |
| New Orders | 56.7 | — | 56.0 |
| Employment | 52.8 | — | 49.7 |
| Prices Paid | 71.1 | 70.0 | 73.0 |
| New Export Orders | 53.0 | — | 48.5 |
| Backlog of Orders | 55.0 | — | 50.5 |
Key Takeaways
- ISM Manufacturing PMI jumped from 53.3 to 55.6, the highest reading since May 2022, pointing to a further acceleration in US factory activity.
- ISM estimates the July PMI is historically consistent with 2.8% annualized real GDP growth, suggesting manufacturing continues to support overall economic expansion.
- Production surged from 52.2 to 58.5, its highest level in nearly five years, while the Employment Index returned to expansion at 52.8, its first expansionary reading in 33 months.
- Demand remained healthy, with New Orders rising to 56.7, New Export Orders returning to expansion at 53.0, and Backlog of Orders climbing to 55.0, indicating factories continue to receive more work than they can immediately process.
- Inflation pressures eased only modestly. Prices Paid fell from 73.0 to 71.1 but remained elevated, with respondents continuing to cite tariffs, higher steel and aluminum prices, and Middle East-related energy costs as key drivers.
- Overall, the report portrays an economy with strong manufacturing momentum and persistent inflationary pressures, giving the Fed greater flexibility to tighten policy if upcoming inflation data fail to improve.
