U.S. manufacturing activity jumped in July to its highest level in more than four years, but the real power in the story sits with the Federal Reserve, which is weighing whether to tighten policy again while prices keep grinding higher for everyone else.
The Institute for Supply Manufacturing reported a 55.6 reading in its July survey of the manufacturing landscape, the fastest pace of growth in more than four years and the best since May 2022. The index topped Wall Street expectations for 54.0, and anything above 50 means expansion. That’s the headline the markets like. The rest is the bill.
Who Gets Squeezed
Leading the way were strong gains in new export orders, backlogs and a 6.3-point spike in production. The employment gauge also hit its highest since August 2022 and marked an expansion for the first time in 33 months, ISM officials said. On paper, that sounds like momentum. In practice, it means businesses are moving faster while workers and buyers still live under the pressure of unstable prices and longer lead times.
The prices index edged lower, but only to 71.1. That means nearly three-quarters of all respondents still reported prices heading higher, and it was the 22nd straight month that happened. The survey’s own commentary described a volatile environment, with purchasing managers trying to stay ahead of events like the Iran war and tariffs. The machinery of commerce keeps running, but the people inside it are stuck reacting to shocks from above.
An executive in the primary metals sector said, “No normalcy in sight in the world of metals. It makes me yearn for the coronavirus pandemic chaos, which was more manageable than whatever this is that we are in.” A manager in the electrical equipment, appliances and components industry said, “The pricing volatility and lead-time extensions in this market are arguably worse than the pandemic era.” The manager added, “During Covid-19, we saw a surge of price hikes and inventory buy-ups, which caused constraints that eventually leveled out.” This time around, “We are seeing nothing but consistent upward trends for both pricing and lead times that show no signs of slowing down,” the manager said.
The ISM survey lists respondents by industry but not by name. Even there, the structure stays opaque. The people living with the consequences get categories, not faces.
What the Fed Calls Stability
From a policy standpoint, the manufacturing data gives the Federal Reserve another excuse to lean harder on the economy. Several analysts said the report could bolster the case for an interest rate increase soon, with a hike as soon as September now looking more likely if price pressures keep holding and the labor market stays steady. Around this time last year, officials were worried about flat hiring and delivered three consecutive rate cuts starting in September.
Inflation data for June was fairly positive, as a short pause in Middle East tensions drove down energy prices and shelter costs continued to moderate. But virtually all pricing gauges still show inflation well above the Fed’s 2% target. The Federal Open Market Committee last week voted to hold its key overnight interest rate in a range between 3.5%-3.75%, where it has been all year.
Federal Reserve official John Williams said inflation is expected to ease, but the Fed will act if it does not. That’s the language of the apparatus: patience for the top, pressure for everyone else.
Jeffrey Roach, chief economist at LPL Financial, wrote, “If trade is less of a drag this quarter and businesses restock inventories, economic growth could reach 2.2% in the third quarter. As a result of demand-induced inflation and energy supply shortages, the Warsh-led Fed will be pressured to raise rates on September 16.” Troy Ludtka, senior U.S. economist at SMBC Nikko Securities Americas, noted that the boost in the production index put it at its highest level since November 2021. He wrote, “Strong payroll growth from two of the most interest rate sensitive sectors [manufacturing and construction] will enable the Fed to continue its hawkish communication drift.”
Following the ISM report, Goldman Sachs said it is tracking third-quarter economic growth at 2.4%, up from the initial estimate of 1.5% for the second quarter. Traders, though, remained at least a bit skeptical of a coming rate hike after comments from Warsh last week that many market participants saw as ambiguous at most. Odds for an increase at the Sept. 15-16 meeting of the FOMC stood at 64.5% midday Monday, down slightly from Friday, according to the CME Group’s FedWatch tool.
Richard de Chazal, macro analyst at William Blair, wrote, “Companies continue to complain about the pricing environment, and this report shows that this is not changing much. From the Fed’s perspective today’s [ISM] report should help tilt the scales further toward tightening policy at the September FOMC meeting.” The bosses and their analysts call it discipline. The people paying for it call it something else.