The latest ISM manufacturing survey for July revealed the fastest pace of U.S. factory growth in more than four years, with a headline reading of 55.6.
That figure surpassed Wall Street expectations of 54.0 and represents the strongest performance since May 2022, according to the Institute for Supply Management.
The index measures the share of companies reporting expansion, meaning any reading above 50 signals growth across the manufacturing sector.
Leading the gains were strong increases in new export orders, production backlogs, and a 6.3-point spike in production activity during the month.
The employment gauge also hit its highest level since August 2022, marking the first time the labor component signaled expansion in 33 months.
Yet beneath the broadly positive headline numbers, purchasing managers described a pricing environment that some compared unfavorably to the worst disruptions of the Covid-19 pandemic.
“The pricing volatility and lead-time extensions in this market are arguably worse than the pandemic era,” one manager in the electrical equipment, appliances and components industry said.
“During Covid-19, we saw a surge of price hikes and inventory buy-ups, which caused constraints that eventually leveled out,” the same respondent continued, adding that “we are seeing nothing but consistent upward trends for both pricing and lead times that show no signs of slowing down.”
An executive in the primary metals sector offered equally stark commentary, saying “no normalcy in sight in the world of metals” and that current conditions made them “yearn for the coronavirus pandemic chaos, which was more manageable than whatever this is that we are in.”
The prices index dipped slightly but remained elevated at 71.1, meaning nearly three-quarters of respondents reported prices continuing to climb, marking the 22nd consecutive month that has occurred.
Those persistent price pressures are now intensifying scrutiny on the Federal Reserve, with several analysts arguing the data makes a September rate hike increasingly likely.
The Federal Open Market Committee voted last week to hold its benchmark overnight rate in a range of 3.5% to 3.75%, where it has remained throughout the year.
“If trade is less of a drag this quarter and businesses restock inventories, economic growth could reach 2.2% in the third quarter,” wrote Jeffrey Roach, chief economist at LPL Financial.
Roach added that “as a result of demand-induced inflation and energy supply shortages, 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 the production index reached its highest point since November 2021 and said strong payroll growth in manufacturing and construction “will enable the Fed to continue its hawkish communication drift.”
Goldman Sachs revised its third-quarter economic growth estimate upward to 2.4%, compared to an initial second-quarter estimate of just 1.5%.
Odds for a rate increase at the September 15-16 FOMC meeting stood at 64.5% midday Monday, according to CME Group’s FedWatch tool, down slightly from Friday’s levels.
Richard de Chazal, macro analyst at William Blair, wrote that “companies continue to complain about the pricing environment” and that the ISM report “should help tilt the scales further toward tightening policy at the September FOMC meeting.”
Fed Chairman Kevin Warsh drew attention last week after comments that many market participants interpreted as ambiguous regarding the central bank’s near-term intentions on rates.
With inflation still running well above the Fed’s 2% target across virtually all major gauges, analysts broadly agree that the manufacturing sector’s pain will keep pressure squarely on policymakers heading into the fall.
