US manufacturing posts worst contraction in nine months
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In July 2025, the Institute for Supply Management’s Manufacturing PMI registered 48.0, marking the fifth consecutive month of contraction and the steepest decline since October 2024. The data continues a consistent pattern of underperformance in the industrial sector, shaped by persistent inflation, elevated input costs, and ongoing supply chain recalibration.
A PMI reading below 50 typically signals contraction. This latest figure strengthens concerns that industrial output will remain weak through the third quarter. While the Federal Reserve has so far downplayed the importance of short-term softness in manufacturing, analysts are increasingly warning that the slowdown is no longer confined to isolated sectors.
Production showed marginal improvement, with the index rising to 51.4. However, the modest gains in output are not sufficient to counterbalance continued losses in new orders and employment. New orders declined for the sixth consecutive month, with the index at 47.1, reflecting ongoing hesitation among domestic and international buyers.
The S&P Global PMI also declined, registering 49.8 in July. This alignment between ISM and S&P data confirms that both large-scale and mid-sized manufacturers are facing similar downward pressure. As firms continue to delay capital investment, reduce shifts, and reevaluate their hiring plans, the contraction appears to signal more than a temporary dip. It points to a deeper structural transformation underway in the US industrial economy.
Hiring slows as manufacturers prepare for further disruption
The employment index fell sharply to 43.4 in July, marking its lowest point since the summer of 2020. That period was defined by widespread furloughs brought on by the pandemic. This recent drop, however, is linked not to health restrictions but to sustained weakness in demand and pricing instability.
Key regions such as the Midwest and South have seen marked declines in job postings for industrial roles. Staffing agencies servicing the manufacturing sector report a shift toward temporary contracts and short-term assignments. Permanent hiring is being postponed or withdrawn in several cases.
Firms across multiple sectors, including automotive, aerospace, and fabricated metals, cite policy uncertainty and cost volatility as primary reasons for tightening their labor strategies. Several employers have noted delays in both international orders and federal procurement contracts. These delays have further complicated labor planning.
Small and mid-sized manufacturers are more exposed to this pressure. With limited financial reserves and less leverage with suppliers, they are scaling back more aggressively. July saw several plant closures and workforce reductions among firms with under 500 employees.
The slowdown in hiring is contributing to wage stagnation in factory positions, despite ongoing shortages in skilled trades. If this trend continues, national payroll data could reflect broader employment losses in the industrial economy and influence the timing of the Federal Reserve’s policy decisions.
Input costs and delivery trends are pressuring operating margins
While consumer inflation has eased slightly in recent months, manufacturing input costs remain elevated. The ISM prices paid index stood at 64.8 in July, down from 69.7 in June but still well above the threshold indicating cost pressure.
Rising energy, shipping, and raw material expenses continue to impact profit margins. Although some companies have passed on higher costs to their customers, many firms locked into long-term contracts are unable to adjust pricing quickly.
The supplier deliveries index fell below 50 for the first time in several months. While this would normally indicate improved delivery times, in this case it more likely reflects reduced order volume. Lower demand means shorter lead times, not necessarily greater efficiency.
Just-in-time manufacturing models are now being reassessed. Volatile pricing and inconsistent delivery schedules have prompted a shift toward localized sourcing and longer inventory cycles, even if it means higher per-unit costs.
Some companies still hold excess inventory from early 2024, when demand temporarily surged. This overhang is contributing to reduced new orders and limiting firms’ ability to renegotiate contracts on favorable terms.
Tariffs are reshaping cost structures across industrial supply chains
A major contributor to the manufacturing decline is the sustained elevation of US tariffs. As of July 2025, the average effective tariff rate reached 20 percent, a level not seen since pre–World War II economic conditions.
These tariffs are no longer limited to high-profile commodities. They now cover a wide range of inputs including packaging, circuit boards, mechanical components, and engineered plastics. The automotive sector, in particular, is experiencing heavy losses, with some manufacturers facing part-specific tariffs as high as 72 percent.
Legal challenges to the current tariff regime remain unresolved. A federal court ruling in May attempted to roll back elements of the policy, but enforcement is suspended pending appeal. In the meantime, manufacturers must plan their supply chains without a clear view of how these policies will evolve.
Large multinational corporations are better equipped to absorb these shocks or reroute sourcing. Smaller firms face far greater difficulty. They must either pay higher costs or reduce volume. For many, the result has been layoffs, deferred capital projects, and permanent exits from global markets.
Industry surveys reveal that executives are more concerned with policy instability than with labor shortages or interest rates. The inability to plan beyond a single quarter is becoming a strategic liability, especially in capital-intensive industries such as energy infrastructure and high-tech manufacturing.
The Federal Reserve remains cautious. While it has signaled openness to rate adjustments, the bank’s primary focus remains inflation control. However, with core inflation moderating and job growth slowing, attention is gradually shifting toward stabilizing the broader economy.
Some analysts now expect a rate cut before the end of the third quarter. This would ease borrowing costs, especially for mid-market firms and manufacturers with limited liquidity. Yet interest rate adjustments alone will not reverse the sector’s slowdown.
US GDP growth in the first half of 2025 was only 1.2 percent. This weak expansion, when combined with contracting factory output, raises concerns that manufacturing could drag broader economic performance below forecast targets. Multiple banks and think tanks have lowered their outlooks for the remainder of the year.
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