US Manufacturing PMI Hits 55.6% in July, Fastest Expansion in Four Years

[Mexico City = Shim Young-jae, Correspondent] The US manufacturing sector has continued its expansion for seven consecutive months, recording the fastest growth in over four years. New orders and production have increased, and employment has returned to an expansion phase for the first time in 33 months. Demand for artificial intelligence (AI) and semiconductors has supported the manufacturing sector, while cost pressures from tariffs and conflicts in the Middle East have persisted.

According to the Institute for Supply Management (ISM), the Manufacturing Purchasing Managers' Index (PMI) for July was 55.6%, up 2.3 percentage points from June's 53.3%. This is the highest level since May 2022, when it was 55.9%. ISM reported that US manufacturing activity has expanded for seven consecutive months, and the overall economy has grown for 21 months in a row.

Production Soars by 6.3 Percentage Points... Employment Also Turns to Expansion

According to ISM, all five sub-indices that make up the manufacturing PMI—new orders, production, employment, supplier deliveries, and inventories—entered the expansion territory in July.

The new orders index rose to 56.7%, up 0.7 percentage points from June's 56%. New orders have continued to expand for the seventh month after four months of contraction.

The increase in the production index was even larger. The production index for July was 58.5%, a jump of 6.3 percentage points from June's 52.2%. This is the highest figure since November 2021, when it was 60.5%. Production has expanded for nine consecutive months.

The employment index rose to 52.8%, up 3.1 percentage points from June's 49.7%. This is the highest level since August 2022, when it was 54.2%, and it marks the first entry into the expansion territory in 33 months.

Susan Spence, chair of the ISM Manufacturing Business Survey Committee, reported that 60% of the surveyed companies are hiring, while 40% indicated that managing workforce size remains a common situation.

The supplier deliveries index rose to 58.9%, up 1.5 percentage points from the previous month's 57.4%. The supplier deliveries index is a measure that is interpreted in the opposite direction within the ISM PMI. A reading above 50% indicates that delivery speeds are slowing. Delivery speeds have slowed for eight consecutive months up to July.

The inventory index fell to 51.2%, down 0.2 percentage points from June's 51.4%, but it remained in the expansion territory. The customer inventory index dropped from 42.3% to 40.7%, a decrease of 1.6 percentage points, remaining at a 'too low' level.

ISM explained that maintaining low customer inventories is generally interpreted as a positive signal for future production.

Exports and Imports Increase Together... Price Pressures Persist

Demand indicators have also generally improved. The backlog index rose to 55%, up 4.5 percentage points from June's 50.5%.

The new export orders index increased from 48.5% to 53%, a rise of 4.5 percentage points, re-entering the expansion territory. This is the highest level since March 2022, when it was 53.2%.

The import index also rose from 52.9% to 55.7%, an increase of 2.8 percentage points, the highest since June 2021, when it was 61%.

Pressure from rising raw material prices has continued. The price index fell to 71.1%, down 1.9 percentage points from June's 73%, but it has remained in the price increase territory for 22 consecutive months. The price index has fallen for three consecutive months compared to the previous month.

According to Chair Spence, the price index is affected by rising steel and aluminum prices, tariffs applied to many imports, and rising prices of petroleum-based products due to conflicts in the Middle East.

The percentage of respondents reporting rising raw material prices in July was 50.2%, down 4.9 percentage points from June's 55.1%.

Concerns about price volatility and geopolitical risks were evident in companies' evaluations. According to ISM, in July, 38% of corporate responses were positive, while 62% were negative. The ratio of positive to negative responses was 1 to 1.6.

Among the negative responses, 57% mentioned price volatility. The percentage mentioning the Iran conflict was 43%, while the percentages mentioning increased lead times and tariffs were 22% and 18%, respectively.

Strong Demand for AI and Semiconductors... Tariffs and Middle East Issues are Burdens

According to ISM, 15 out of 18 manufacturing sectors experienced growth in July. Only the chemical products sector contracted.

Among the six major manufacturing sectors in the US, four—transportation equipment, machinery, computers and electronics, and food, beverage, and tobacco products—expanded. In particular, demand related to AI and semiconductors has driven growth for some manufacturers.

A respondent from the computer and electronics sector stated that favorable demand conditions continue due to growth in semiconductors, AI, advanced packaging, and high-performance computing markets. The increase in companies' revenues and ongoing investments in manufacturing capacity, technology, and customer support underpin a positive business outlook.

A respondent from the machinery sector noted that as the global AI infrastructure approaches full operational status, the procurement and production of products entering data centers are rapidly expanding. Consequently, demand for semiconductor end products and power, networking, and photonics connection products has surged. Demand from the defense industry is also at an all-time high.

In contrast, the transportation equipment sector cited geopolitical risks in the Middle East and tariffs as burdens. One respondent mentioned that conflicts in the Red Sea, the Strait of Hormuz, and the Suez Canal have altered transportation routes, increasing costs and transportation times.

In the electrical equipment, appliances, and components sector, opinions were expressed that price and lead time issues are more severe than during the COVID-19 pandemic. The respondent indicated that prices for printed circuit board assembly components have risen by 5-25%, and substrate prices have increased by 15-45%, negatively impacting next year's customer demand outlook.

ISM explained that sectors contributing to 20% of the manufacturing GDP in July experienced contraction, an increase from 5% in June. However, there was no manufacturing GDP share corresponding to a strong contraction state, which is indicated by a comprehensive PMI below 45%. In June, this figure was 3%.

ISM stated that when the manufacturing PMI remains above 47.5% for a certain period, it generally indicates expansion in the overall US economy. Applying the historical relationship between the manufacturing PMI and the US economy, the July PMI of 55.6% corresponds to an annual real GDP increase of 2.8%.

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