US factory PMI jumps to 55.6, four-year high that pressures Fed

US factory activity accelerated to its strongest reading since May 2022, with the ISM manufacturing PMI jumping to 55.6 from 53.3 in June, beating the 54 consensus and complicating the Fed's inflation fight.

"In July, US manufacturing activity remained in expansion territory, growing at its fastest rate in more than four years," Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said in the report.

The employment index rose 3.1 points to 52.8, entering expansion for the first time in 33 months, while new orders expanded for a seventh consecutive month at 56.7. Production surged to 58.5 from 52.2, and backlog of orders climbed to 55.0 from 50.5. The prices paid index eased to 71.1 from 73.0 but remained well above the 60 average of the six months preceding the US-Iran war.

The report lands as the Fed holds its benchmark rate at 3.50 percent to 3.75 percent after last week's meeting, where three of 12 committee members dissented in favor of a quarter-point hike. With inflation risks tilted to the upside because of the conflict now in its sixth month, the data strengthens the case for further tightening at the September meeting.

The breadth of the expansion is notable. Four of the five PMI components improved, with only inventories slipping 0.2 point to 51.2. New export orders returned to expansion at 53.0 from 48.5, and imports rose to 55.7 from 52.9. Customers' inventories fell to 40.7, remaining in "too low" territory — a level ISM considers positive for future production as buyers eventually need to restock.

Prices Paid at 71.1 Keep Inflation Pressures Alive

The caution flag sits in the prices paid index. At 71.1, input costs remain far above the 60 average of the six months preceding the war, even after easing from June's 73.0. Supplier deliveries slowed further to 58.9 from 57.4, reflecting supply chain bottlenecks rather than improved efficiency. ISM noted that 57 percent of negative comments cited pricing volatility, 43 percent cited the Iran war, and 18 percent cited tariffs.

The manufacturing sector, which accounts for about 9.4 percent of the US economy, has been supported by businesses front-loading orders to avoid higher prices and shortages tied to the conflict. An artificial intelligence buildout is also driving activity in the technology sector, blunting the hit from import tariffs. Business inventories have declined for five straight quarters, leaving ample room for further expansion.

Stocks Rally, Dollar Firms on Strong Data

US equities rallied on the release, with the Dow Jones Industrial Average up 1.37 percent, the S&P 500 up 0.99 percent, and the Nasdaq Composite up 1.24 percent. The US Dollar Index rose 0.14 percent to 99.94, while GBP/USD slipped 0.27 percent to 1.3439 as the stronger dollar weighed on the pound. Oil prices eased, with WTI down more than 8 percent to below $80 a barrel after President Donald Trump halted attacks on Iran.

The last time the PMI exceeded 55 was in May 2022, when the index printed 55.4 before the Fed's aggressive tightening campaign pushed it into contraction for most of the following year. The current reading suggests the manufacturing cycle has turned decisively, but the elevated prices component means the Fed faces a harder trade-off between supporting growth and containing inflation.

Looking ahead, the market will watch the upcoming nonfarm payrolls report for confirmation that the employment rebound extends beyond manufacturing. If the labor market follows the ISM employment index higher, futures pricing for a September hike — currently at 22 basis points of tightening — could firm further.

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