U.S. manufacturing activity reached a four-year peak in July, propelled by substantial investments in artificial intelligence infrastructure, according to a survey released Monday by the Institute for Supply Management (ISM). The ISM's manufacturing gauge rose to 55.6, indicating the fastest pace of expansion since May 2022 and marking the seventh consecutive month of growth. A reading above 50 signals expansion, while a reading below 50 indicates contraction.
Susan Spence, chair of the ISM Manufacturing Business Survey Committee, attributed the manufacturing boost in part to increased clarity regarding President Trump's tariff policies and optimism for a resolution to the war in Iran. She noted that companies are observing solid demand factors moving in a favorable direction for at least six months. "My gut is, it’s not just a one- or two-month trend," Spence stated.
The survey indicated significant growth in production, with its gauge reaching its highest level since the end of 2021. The employment measure increased to 52.8, the first rise in nearly three years, and new orders, a key indicator of demand, also saw an increase. Experts pointed to large-scale business investments in AI infrastructure and political pressure to strengthen domestic manufacturing as key drivers of this expansion.
Despite the overall growth, survey respondents expressed concerns about price volatility, citing the conflict in Iran and potential Federal Reserve interest rate hikes as significant risks. "Pricing volatility was mentioned in 57% of negative comments, the Iran war 43%, increasing lead times 22% and tariffs 18%," Spence reported. Some manufacturers noted challenges in meeting demand due to increased costs and transit times associated with rerouted shipments around the Red Sea, Strait of Hormuz, and Suez Canal. The demand spike for certain electronics components, driven by the AI race, also strained supply chain fulfillment.
Jackson Barnes, CEO of Novo, a financial platform for small businesses, highlighted that the expansion in AI data centers is a primary driver of manufacturing investments, though he observed this has a disproportionate effect on the industry. "Look at where the demand is coming from. It’s coming from semiconductors, AI infrastructure and defense. Those are capital-intensive supply chains dominated by large manufacturers," Barnes said. He added that while overall volume in the sector has increased, median quarterly revenue for smaller manufacturers has decreased.
Tech companies, including Meta and Microsoft, have announced substantial capital expenditures for AI development, contributing to the demand. Rising oil prices linked to the Iran conflict have also increased costs across the manufacturing sector, with many businesses worried that the Federal Reserve might raise interest rates to combat inflation, potentially halting their growth.
Overall, the report showed broad-based growth, with all but one manufacturing industry sector reporting expansion in July. The computer and electronic products, electrical equipment, appliances, and components sectors all saw growth. Chemical products were the only sector to contract during the month. Amrita Bhasin, co-founder and CEO of Sotira, expressed optimism due to the convergence of positive factors, noting the significant investment in AI infrastructure, which is resource-intensive.