At a Glance

  • Manufacturing activity expanded for a second consecutive month, despite high input prices, uncertain business prospects due to changing U.S. tariff rates, and the fact that the survey data was collected before recent military strikes on Iran pushed up energy prices. This conclusion is based on a measure of factory activity.
  • Data released Monday by the Institute for Supply Management (ISM) showed its manufacturing index edged down to 52.4 from 52.6, but remained above the 50 expansion threshold. The index of prices paid by manufacturers jumped 11.5 points to 70.5 in a single month, thehighest level since June 2022。
  • The ISM employment index rose 0.7 percentage points from the previous month, butremained in contraction territory. "Forty-five percent of the survey panel members still indicate that managing current staffing levels, rather than hiring, is the norm for their companies," said Susan Spencer, chair of the ISM Manufacturing Business Survey Committee, in a statement.

In-Depth Analysis

Since last Saturday, strikes by U.S. and Israeli warplanes on Iran have pushed up prices for crude oil and other energy commodities. On Monday,Brent crude oil futures prices surged 8.8%。

A prolonged conflict in the Middle East could keep energy prices elevated and jeopardize the manufacturing sector's growth gains so far this year.

Rising energy prices are just one of the "major headwinds" hitting manufacturing, said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, on Monday. In a report, Allen noted that consumer demand is clearly softening and that "comments in the ISM survey continue to mention significant disruptions and cost increases from tariffs."

"Uncertainty over trade policy continues to weigh heavily on investment intentions. This drag has intensified again following the Supreme Court's rejection of most of the Trump administration's tariffs and the president's subsequent introduction of new tariffs," Allen said.

Regarding the manufacturing outlook, Allen predicted "modest growth" in output rather than a boom.

Inflation has remained above the Federal Reserve's 2% target for nearly five years, and recent signs indicate its impact on manufacturers, other businesses, and consumers is persisting.

The Producer Price Index (PPI) rose 0.5% month-over-month and 2.9% year-over-year last month, both exceeding market expectations. The Bureau of Labor Statistics said last Friday that services were the main driver of the PPI increase—the index measures prices charged by wholesalers, with so-called final demand services prices rising 0.8% month-over-month in January, the largest monthly gain since July of last year. Final demand goods prices fell 0.3% month-over-month.

The Yale Budget Lab said Monday that, based on Personal Consumption Expenditures (PCE) index data, so-called core goods (excluding volatile food and energy commodities)saw import prices rise 2% last year, compared with no change in the same 12-month cycle that began in 2023.

According to ISM data, industries reporting growth last month included primary metals, printing, textiles, and nine others, while producers of furniture, apparel, and three other categories reported contraction.