KEY POINTS
- The ISM Manufacturing PMI registered 52.4 in February, slightly down from January’s 52.6 but well above the 50.0 threshold that separates expansion from contraction.
- A key gauge of prices paid by manufacturers soared to 70.5, the highest reading since October 2022, signaling that factory-gate inflation is accelerating.
- The rebound in activity is being fueled by technology manufacturing, particularly due to the massive build-out of artificial intelligence (AI) infrastructure and data centers.
The American manufacturing sector showed resilience in February, defying economist predictions of a sharper slowdown. The Institute for Supply Management (ISM) reported that its manufacturing index held steady at 52.4, marking the first time in four years the sector has seen back-to-back months of growth. While the headline figure was slightly lower than January’s, it beat the consensus forecast of 51.8, suggesting that the “nascent recovery” in factory activity is more robust than initially feared.
However, the silver lining of growth is shadowed by a darkening cloud of inflation. The survey’s prices paid index jumped from 59.0 to 70.5, a near 3.5-year high. This spike occurred even before the weekend’s dramatic military escalation in Iran, which killed Supreme Leader Ayatollah Ali Khamenei and sent global oil and natural gas prices rocketing on Monday. Economists warn that these rising input costs, coupled with President Trump’s 10% global tariffs (which he has announced will rise to 15%), are creating a perfect storm for goods inflation.
The internal data of the ISM report highlights a complex landscape for manufacturers. New orders and production remained in expansion territory, and backlogs of orders hit their highest level since mid-2022. Twelve different industries reported growth, led by primary metals, machinery, and computer and electronic products. The technology sector, in particular, continues to be a bright spot as the AI boom drives a sustained demand for specialized hardware and infrastructure.
Despite the growth in output, the labor market remains a weak point for the sector. Manufacturing employment declined slightly for the month, and the sector has lost approximately 83,000 jobs since the start of 2025. Many firms reported using layoffs and leaving open positions unfilled as a way to manage headcounts amidst “tariff instability” and uncertain mid-term demand. The U.S. Supreme Court recently struck down a previous set of emergency tariffs, but the swift implementation of replacement duties has kept manufacturers in a state of prolonged uncertainty regarding their supply chain costs.
For the Federal Reserve, the February data is particularly troubling. The combination of steady demand and surging input prices suggests that “further goods inflation pressures” are in the pipeline. With energy prices now spiking due to the conflict in the Middle East and the disruption of shipping in the Strait of Hormuz, the likelihood of a near-term interest rate cut has diminished significantly. Investors are now bracing for a “higher-for-longer” rate environment as the central bank waits to see if these price increases pass through to the broader consumer economy.
