Manufacturing survey shows inflation worries 'worse than pandemic era,' adding to Fed pressure

A burst in factory activity shows the U.S. economy may be escaping the burden of tariffs and gaining manufacturing jobs, while at the same time laboring under the geopolitical uncertainty that some industry leaders say is worse than the Covid pandemic.

In its July survey of the manufacturing landscape, the Institute for Supply Manufacturing reported the fastest pace of growth in more than four years — a 55.6 reading that was the best since May 2022 and above Wall Street expectations for 54.0. The index measures the percentage of companies reporting growth, so anything above 50 represents expansion.

Leading the way were strong gains in new export orders, backlogs and a 6.3-point spike in production. At the same time, the employment gauge hit its highest since August 2022 and marked an expansion for the first time in 33 months, ISM officials said.

The prices index edged lower, but only to 71.1, indicating that nearly three-quarters of all respondents reported that prices were heading still higher, the 22nd straight month that has happened.

Moreover, the commentary pointed to a highly volatile environment in which purchasing managers were struggling to stay ahead of events like the Iran war and tariffs.

"No normalcy in sight in the world of metals," an executive in the primary metals sector said. "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 voiced similar concerns.

"The pricing volatility and lead-time extensions in this market are arguably worse than the pandemic era," the respondent said. "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.

From a policy standpoint, the manufacturing industry dynamic presents a challenge to the Federal Reserve that several analysts found likely to bolster the case for an interest rate increase soon.

A solid economic picture with ongoing price pressures could push Fed Chairman Kevin Warsh and his colleagues into a hike as soon as September, particularly considering the seeming stability of the labor market. Around this time last year, officials were expressing substantial worry over a flat hiring picture, leading to 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. However, virtually all pricing gauges show inflation still well above the Fed's 2% target.