U.S. manufacturing activity experienced a slowdown in August, with the Institute for Supply Management's (ISM) Manufacturing PMI falling to 54.6 from 55.6 in July. Despite this dip, the PMI has remained above the 50-point threshold throughout the year, indicating continued growth in the sector. The moderation in activity followed robust growth in July, which saw the highest PMI reading since May 2022. Economists polled by Reuters had anticipated a drop to 55.2, making the actual decline slightly sharper than expected.
Key concerns for manufacturers included the impact of tariffs, the Middle East conflict, and rising costs for essential materials like steel and aluminum. Approximately 58% of comments from ISM survey respondents were negative, with pricing volatility, increasing lead times, and geopolitical tensions being major factors. High steel and aluminum prices, partly due to Section 232 tariffs, were specifically cited by transportation equipment manufacturers as a challenge to profitability. Makers of chemical products described the economic environment as "annoying," while machinery manufacturers reported ongoing price increases for all goods, leading some to shift production offshore to mitigate costs.
Demand related to artificial intelligence (AI) continued to support factory growth, but also contributed to higher prices for electronics and semiconductors, with some computer and electronic product manufacturers comparing the current market to a crisis even larger than the COVID-19 pandemic. The ISM survey's new orders measure declined to 53.7 from 56.7 in July, yet supply chain pressures persisted, as indicated by the supplier deliveries index rising to 59.3 from 58.9, signifying slower deliveries. The gauge of prices paid for inputs remained unchanged at 71.1, suggesting that inflation at the factory gate could stay above the Federal Reserve's 2% target. Persistent inflation pressures and strong labor market data have heightened expectations that the Federal Reserve might raise interest rates, potentially as early as September 16, according to John Ryding, chief economic advisor at Brean Capital.
Manufacturers' optimism, however, continues to tick up, buoyed by expectations for stronger sales, with sales and production projected to grow by 4.3% and 3.8% respectively over the next 12 months, the fastest rates since Q2 2022. To support this anticipated growth, nearly two-thirds (63.0%) of manufacturers plan to import industrial machinery in the next year, with a significant portion (69.2%) for upgrades or replacements and 63.6% for new or expanded operations. This underscores the critical need for access to equipment amidst global disruptions. The National Association of Manufacturers' (NAM) Q3 Manufacturers' Outlook Survey, conducted from August 11-27, 2026, revealed that raw material and other input costs are expected to increase by 5.0% over the next year, with 60.6% of respondents stating that conditions related to the Middle East conflict have not improved, and 33.2% saying challenges have worsened. Transportation costs are also straining supply chains, with 77.3% citing freight rates and 74.1% citing fuel costs as challenges, and 98.6% relying on trucks for goods movement.
