The U.S. manufacturing sector's performance improved in July, reaching its highest level in more than four years. The Institute for Supply Management (ISM) reported Friday that the July Manufacturing PMI rose to 55.6%, a 2.3 percentage point increase from June. This marks the best reading since May 2022 and the seventh consecutive month of expansion.
The ISM noted that a PMI consistently above 47.5% typically signals overall economic growth. The July data corresponds to an annualized U.S. real GDP growth rate of approximately 2.8%, indicating the economy has been expanding for 21 straight months. A broad-based improvement was seen across key sub-indexes. The New Orders Index rose to 56.7%, up 0.7 percentage points from June, marking its seventh month of expansion. The Production Index surged 6.3 percentage points to 58.5%, the highest level since November 2021. The Employment Index climbed 3.1 percentage points to 52.8%, returning to expansion territory for the first time in 33 months, reflecting renewed hiring efforts by manufacturers. The survey showed that 60% of respondents are currently hiring, while only 40% are still focused on controlling headcount.
Meanwhile, the Backlog of Orders Index increased to 55% from 50.5%, and the Supplier Deliveries Index rose to 58.9%, marking the eighth consecutive month of slower delivery times, indicating strong demand. The Inventories Index edged down to 51.2%, still in expansion, while the Customers' Inventories Index fell to 40.7%, remaining in the "too low" range. The ISM stated that persistently low customer inventories usually signal future restocking demand, supporting subsequent production. Export demand also showed significant improvement. The New Export Orders Index returned to expansion territory in July, rising 4.5 percentage points to 53%, its highest level since March 2022. The Imports Index climbed to 55.7%, the highest since June 2021, showing increased demand for imported raw materials and components.
On pricing, the Prices Index fell for the third consecutive month, dropping from 73% to 71.1%. Despite the decline, it remains at an elevated level, indicating raw material prices have risen for 22 straight months. The ISM pointed to higher steel and aluminum prices, tariffs on imported goods, and the Middle East situation driving up oil-related product prices as the three main factors behind rising manufacturing costs. In July, 50.2% of companies reported higher purchase prices, a decrease from June, but pricing pressure remains evident. In terms of industry performance, 15 of 18 manufacturing sectors reported growth, with only the chemical industry contracting. Among the six largest manufacturing sectors, transportation equipment, machinery, computer and electronic products, and food, beverage, and tobacco products all continued to expand. For new orders, 12 industries reported growth, and for production, 12 industries also reported growth, with no industry reporting a decline in output.
Notably, AI infrastructure construction is becoming a key driver of manufacturing growth. Companies in the computer and electronic products industry reported sustained growth in demand for semiconductors, artificial intelligence, advanced packaging, and high-performance computing. They noted strong sales, capacity expansion, and customer support investment, pointing to a positive outlook. Machinery industry companies indicated that as global AI infrastructure construction enters a full-scale launch phase, procurement and manufacturing of data center-related products are accelerating rapidly. Demand for semiconductor products used in data center power, networking, and optical communication connections is growing quickly. Defense industry orders also remain at historically high levels, while demand for medical, industrial, and consumer electronics products is relatively weak.
However, companies remain cautious about the future operating environment. The ISM reported that in July, 38% of respondents' comments were positive, while 62% were negative. Among the negative comments, 57% cited price volatility, 43% mentioned the impact of the Middle East situation, 22% noted extended delivery lead times, and 18% focused on tariff issues. Many companies also reported that the Middle East situation is once again driving up transportation costs and energy prices. Some Asian clients are adjusting their procurement sources to avoid tariffs, and certain industries are concerned that price increases and extended supply cycles, which have surpassed pandemic-era levels, are putting pressure on future demand. Furthermore, the ISM's procurement cycle data showed that the average procurement cycle for capital expenditures in July was 172 days, up one day from June. The cycle for production raw materials extended to 87 days, while the cycle for maintenance, repair, and operating supplies increased to 50 days, further reflecting continued tightness in the supply chain.
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