PMI signals fifth month of contraction and deepening job losses
The U.S. manufacturing sector continued to contract in July, marking the fifth consecutive month of decline, as new tariffs weighed on production costs and labor demand. The Institute for Supply Management (ISM) reported a manufacturing Purchasing Managers’ Index (PMI) of 48.0, down from 49.0 in June and below the 50 threshold that separates growth from contraction.
The reading came in weaker than expected, with economists polled by Reuters forecasting a slight rise to 49.5. Instead, the data points to continued softening in the sector, which makes up just over 10% of the national economy. Economists warn that the broader effects of trade restrictions are beginning to ripple through production and employment.
Factory jobs hit five-year low despite modest output uptick
Even though the ISM’s production index ticked up to 51.4 from 50.3 — indicating a slight expansion — the industry continued to shed workers. The employment sub-index fell to 43.4, its lowest level since July 2020, underscoring the uncertainty manufacturers face amid rising material costs and weakening demand.
The ISM noted a clear “acceleration of headcount reductions,” reflecting a lack of confidence in near- and mid-term market conditions. Many companies are opting to reduce payrolls rather than invest further during an uncertain trade environment.
Tariffs fuel rising input costs and squeeze supply chains
One of the clearest impacts of the ongoing tariff policy has been the steady rise in the cost of imported raw materials. While supplier delivery times improved in July — the relevant index fell to 49.3 from 54.2 — input costs remain elevated. The ISM’s prices paid index dropped slightly to 64.8, but still reflects persistent inflationary pressure.
Separate government data released Thursday showed that goods prices rose in June at the fastest pace in five months. Economists warn this may mark the beginning of sustained tariff-driven inflation, especially in goods-heavy sectors that rely on international supply chains.
Outlook for manufacturing weakens entering second half
New orders — a key forward-looking component — remained in contraction territory for a sixth straight month, despite a minor improvement to 47.1 from 46.4 in June. The sluggish demand environment suggests that factories will continue to operate below capacity as long as elevated costs and economic uncertainty persist.
With manufacturing now in a prolonged slump and employment at multiyear lows, analysts expect further economic drag in the third quarter unless tariffs are reduced or offset by policy stimulus. The Federal Reserve is already facing mounting pressure to cut interest rates in response to a slowing job market and rising inflationary headwinds.
