American factories grew at their fastest pace since 2022 last month. The details have AI and defense spending written all over them.
Most of the sub-indexes in July’s Manufacturing ISM Report on Business showed faster growth, capping a prolonged contraction driven by the 2025 tariffs.
The employment index turned positive for the first time in a long time, suggesting the momentum is not going away anytime soon.
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Risks remain. Energy prices and inflation more broadly could push long-term borrowing costs higher, which would dampen the mood among manufacturers. The prices index still pointed to rapid increases, largely on the back of energy and other input costs.
Looking ahead, we expect more capital expenditure and defense spending to filter through the economy via the manufacturing channel over the remainder of the year. For now, the balance of risks tilts to the upside given current economic conditions.
Inside the data
The headline PMI registered 55.6% in July, up from 53.3% in June, with new orders at 56.7% and production at 58.5%. Employment came in at 52.8%, supplier deliveries at 58.9% and inventories at 51.2%, leaving four of the five headline components running faster than the month before.
Backlogs rose 4.5 points to 55% and new export orders returned to expansion at 53%, also up 4.5 points. The prices index eased to 71.1% from 73%, while customers’ inventories slipped to 40.7% and imports climbed to 55.7%, the highest since June 2021. ISM estimates the July reading corresponds to roughly 2.8% annualized real GDP growth.
