A landmark jump in U.S. factory activity is signalling the economy may be shaking off the weight of tariffs, but a troubling inflation picture is intensifying pressure on policymakers.
The Institute for Supply Management’s July manufacturing survey recorded a reading of 55.6, the strongest performance since May 2022 and comfortably ahead of Wall Street’s forecast of 54.0.
Any reading above 50 represents expansion, meaning the result points to broad-based growth across the sector for the month.
New export orders, production backlogs, and a 6.3-point spike in the production gauge all led the gains, underscoring the depth of the recovery in factory output.
The employment component also hit its highest level since August 2022, marking expansion in manufacturing jobs for the first time in 33 months, according to ISM officials.
However, the prices index remained deeply elevated at 71.1, meaning nearly three-quarters of all respondents reported prices were still rising, continuing a run that has now stretched to 22 consecutive months.
Industry respondents painted a picture of a market gripped by volatility, with some describing conditions as more difficult to manage than the Covid-19 pandemic itself.
“No normalcy in sight in the world of metals,” one 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 said: “The pricing volatility and lead-time extensions in this market are arguably worse than the pandemic era.”
That same manager added: “We are seeing nothing but consistent upward trends for both pricing and lead times that show no signs of slowing down.”
The Federal Open Market Committee last week held its key overnight interest rate steady in a range between 3.5% and 3.75%, where it has remained throughout 2026.
Jeffrey Roach, chief economist at LPL Financial, said demand-driven inflation and energy supply shortages could force action from the central bank in the weeks ahead.
“If trade is less of a drag this quarter and businesses restock inventories, economic growth could reach 2.2% in the third quarter,” Roach wrote, adding that “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 production index rise placed it at its highest level since November 2021.
“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,” Ludtka wrote.
Goldman Sachs revised its third-quarter economic growth tracking estimate upward to 2.4%, up from an initial second-quarter estimate of 1.5%, following the ISM report’s release.
Market odds for a rate increase at the September 15-16 FOMC meeting stood at 64.5% midday Monday, according to the CME Group’s FedWatch, slightly lower than Friday’s levels.
Richard de Chazal, macro analyst at William Blair, said the persistent complaints from companies about the pricing environment make the Fed’s next move increasingly difficult to avoid.
“Companies continue to complain about the pricing environment, and this report shows that this is not changing much,” de Chazal wrote.
He added that from the Fed’s perspective, the ISM report “should help tilt the scales further toward tightening policy at the September FOMC meeting,” leaving Chairman Kevin Warsh and his colleagues with a narrowing set of options.