By Lucia Mutikani
WASHINGTON, June 1 (Reuters) – U.S. manufacturing activity increased more than expected in May, hitting the highest level in four years, likely driven by businesses front-loading orders amid rising prices and shortages because of the war with Iran.
The Institute for Supply Management survey on Monday showed the three-month-old U.S.-Israeli war with Iran, which has virtually closed the Strait of Hormuz, was fracturing supply chains and threatening to undermine the manufacturing recovery.
Businesses ranging from transportation equipment to fabricated metal products complained about “escalating” prices and “customers unwilling to commit to expenditures beyond a very short term.” A fragile ceasefire was under threat on Monday as the United States and Iran traded attacks, boosting oil prices by more than 3%.
“The durability of this manufacturing upturn remains in doubt,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. “Many companies are bringing forward orders and activity to build inventories to protect against supply chain disruptions. That lift likely will be short-lived, and the medium-term outlook for demand still looks shaky.”
The ISM said its manufacturing PMI advanced to 54.0 last month, the highest reading since May 2022, from 52.7 in April. A reading above 50 indicates expansion in manufacturing, which accounts for 9.4% of the economy. Economists polled by Reuters had forecast the PMI rising to 53.
Manufacturing has now grown for five straight months after being dragged down by President Donald Trump’s sweeping import tariffs. It is being anchored mostly by an artificial intelligence spending spree. The conflict has severely disrupted the shipping of commodities and raised prices of goods like energy, aluminum and fertilizers.
Sixteen industries reported growth last month, including textile mills, paper products, electrical equipment, appliances and components as well as primary metals, miscellaneous manufacturing, machinery and transportation equipment. Wood products was the only industry reporting a contraction.
The war was mentioned in 42% of the comments from manufacturers. Tariffs remained a concern, mentioned in 18%. About 57% of the respondents mentioned pricing volatility as an issue for their companies, ISM Manufacturing Business Survey Committee Chair Susan Spence said, adding that “25% of the comments were positive and 69% negative.”
Some manufacturers of transportation equipment said the “Iran conflict (was) starting to directly and negatively impact cost of supply chain.” Makers of machinery said that “the Middle East conflict is triggering shipment delays and uncertainties,” but others in the industry also reported unexpected “increased demand” over the last quarter.
Food, beverage and tobacco products manufacturers said the “cost of diesel is having huge impacts on our profitability,” and also noted confusion “around tariff refunds.” The U.S. Supreme Court in February struck down the broad tariffs. The White House responded with new duties. Trump has defended the tariffs as necessary to revive the domestic industrial base.
MANUFACTURERS REPORT PRICE INCREASES
Some makers of electrical equipment, appliances and components reported that “increased gas prices and tariffs are causing long lead constraints and price hikes that customers are not willing to bear,” with others adding that “panic is starting within our industry.”
Manufacturers of miscellaneous products said the “current atmosphere is one of extreme uncertainty and concern for the future in terms of both price stability and longer-term supply continuity.”
The ISM survey’s new orders measure increased to 56.8 last month from 54.1 in April. There were rises in backlog orders as well as exports. Despite the increase in orders, factory employment remained subdued last month. The ISM’s manufacturing employment index posted its 32nd straight month of contraction after expanding in September 2023.
Its supplier deliveries index was unchanged at a high reading of 60.6. A reading above 50 indicates slower deliveries. A range of products, including aluminum, electrical components, electronic components, resins, semiconductors and steel products were in short supply last month.
Most have been scarce for more than two months. Supply chains were already strained by last year’s tariffs. Longer delivery times likely contributed to the rise in the PMI as they are normally associated with a strong economy and increased customer demand. They are, however, lengthening because of snarled supply chains.
With the delivery performance poor, prices at the factory gate continued to rise, though the pace slowed slightly last month. The survey’s prices paid for inputs measure edged down to a still-high 82.1 from 84.6 in April, which was the highest reading since April 2022, and was lower than forecasts for 85.0.
Sixteen industries reported paying increased prices for raw materials, including paper products, machinery, miscellaneous manufacturing as well as primary metals and transportation equipment. No industry reported a decline in raw material prices.
The price pressures from the conflict and the AI spending boom are spilling over beyond energy goods. Inflation increased at its fastest pace in three years in April, the government reported last week.
Soaring inflation, which is eroding household purchasing power, has left financial markets expecting that the Federal Reserve would keep its benchmark overnight interest rate in the 3.50%-3.75% range into next year.
“Most of the U.S. industry moves by truck, and U.S. diesel prices averaged $5.40 a gallon last week,” said Carl Weinberg, chief economist at High Frequency Economics. “Manufacturing companies will pass through those increased transportation costs as quickly as they can, just as truckers have already passed their higher costs through to manufacturers. The Fed will pay attention to this.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )
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