US factory growth cools to 54.6 as new orders, backlogs slip

The ISM Manufacturing PMI fell to 54.6 in August from 55.6 in July, missing the 55.3 consensus among analysts polled by The Wall Street Journal. The reading marks the eighth consecutive month of expansion after a 10-month contraction stretch that ended in December, but the deceleration was broad-based across key demand indicators.

"U.S. manufacturing activity remained in expansion territory, though it has lost ground in a number of key measures — namely, the New Orders, Backlog and Imports indexes," Susan Spence, Chair of the ISM Manufacturing Business Survey Committee, said in the report released Tuesday.

The New Orders Index fell 3 points to 53.7, the Backlog of Orders Index dropped 3.2 points to 51.8, and the Imports Index slipped 3.2 points to 52.5. Production held relatively steady at 58.3, down just 0.2 point, while employment eased to 51.2 from 52.8. The only subindex that accelerated was Supplier Deliveries, which rose 0.4 point to 59.3 — a sign that supply chain constraints are tightening, not easing.

The 12-month average PMI of 51.8 masks a sharp recovery from the contraction trough. The index bottomed at 47.9 in December 2025 before climbing steadily through the first half of 2026, peaking at 55.6 in July — the highest reading in more than four years. August's pullback, while modest, suggests the recovery may be losing momentum as cost pressures bite.

The breadth of growth narrowed. The share of manufacturing GDP in contraction widened to 22 percent in August from 20 percent in July, with 2 percent in strong contraction (a composite PMI of 45 percent or lower) versus zero in July. Fifteen of 18 industries reported expansion, down from 16 in July, with Wood Products and Chemical Products contracting. Of the six largest manufacturing industries, five still expanded — Transportation Equipment, Petroleum & Coal Products, Computer & Electronic Products, Machinery, and Food, Beverage & Tobacco Products.

Demand sentiment deteriorated notably. The positive-to-negative comment ratio on new orders fell to 2-to-1 from 3.5-to-1 in July, and the overall panelist sentiment flipped to 42 percent positive versus 58 percent negative. The Customers' Inventories Index rose 2.1 points to 42.8, still in "too low" territory — a level that typically supports future production — but the narrowing gap suggests customers are rebuilding stockpiles, which could dampen order momentum in coming months.

Prices Hold at 71.1 as Steel, Tariffs and Middle East Conflict Bite

The price picture is the most consequential element for the Federal Reserve. The Prices Index held at 71.1 for a second consecutive month, with 46.2 percent of respondents reporting higher raw material costs. Steel and aluminum prices continue to climb on Section 232 tariffs, petroleum-based products are rising on the Middle East conflict, and supply chain lead times are stretching. Panelists cited pricing volatility in 57 percent of negative comments, the Iran war in 30 percent, increasing lead times in 46 percent and tariffs in 29 percent.

The last time the Prices Index held above 70 for consecutive months was in 2022, when the Fed was in the middle of its most aggressive tightening cycle in decades. The current reading sits well above the 52.8 threshold historically consistent with rising producer prices, suggesting input cost inflation remains a live concern even as demand cools.

For the Fed, the data cuts both ways. The cooling in new orders and employment supports the case for easing, but the sticky Prices Index argues for caution. A softer-than-expected PMI could raise concerns about the manufacturing outlook and dampen sentiment, while persistent price pressures complicate any dovish pivot. The dollar's direction hinges on which signal the Fed prioritizes — the deceleration in activity or the stickiness in costs.

The next ISM Manufacturing PMI report, covering September data, is due Oct. 1. Markets will also watch Friday's nonfarm payrolls report for confirmation of whether the softening in factory employment extends to the broader labor market.

This article is for informational purposes only and does not constitute investment advice.