Assessing the Resilience of U.S. Manufacturing Amid S&P Global PMI Softening

The U.S. manufacturing sector in 2025 is navigating a paradox: while the ISM Manufacturing PMI contracted to 48.7% in August 2025, signaling a sixth consecutive month of decline, the S&P Global U.S. Manufacturing PMI surged to 53.0%, the strongest improvement since May 2022 [1][2]. This divergence underscores a fragmented recovery, with production and new orders rebounding but employment and broader economic confidence lagging. For investors, this duality demands a nuanced approach to sector rotation, balancing defensive hedges against cyclical growth opportunities.

Defensive Sectors: Utilities and Consumer Staples Outperform

Defensive sectors have emerged as safe havens amid manufacturing volatility. The Consumer Staples Select Sector SPDR ETF (XLP) gained 9% year-to-date in Q2 2025, while the Utilities Select Sector SPDR ETF (XLU) outperformed the S&P 500 by 4 percentage points [3]. This trend aligns with historical patterns during economic downturns, such as the 2008 financial crisis and the 2020 pandemic, where stable demand for essentials insulated these sectors from broader market declines [3]. The National Association of Manufacturers (NAM) Q2 2025 survey further reinforces this shift, noting that 77% of manufacturers cited trade uncertainty as their top concern, driving capital toward low-volatility assets [4].

Growth Sectors: AI and Infrastructure as Catalysts

Despite near-term headwinds, growth sectors tied to AI and infrastructure are gaining traction. The S&P Global PMI highlighted a 3-month production upswing, supported by AI-driven automation and nearshoring initiatives [2]. Private investments, such as NVIDIA’s $500 billion U.S. AI infrastructure commitment and Apple’s $600 billion manufacturing and workforce training pledge, signal a structural shift toward domestic tech production [5]. The CHIPS Act further bolsters this trend by incentivizing semiconductor manufacturing, creating long-term tailwinds for industrial and energy sectors [5].

Tariff Impacts: Winners and Losers in a Policy-Driven Landscape

Tariffs have created a dual-edged sword. While domestic steel producers like Nucor and Steel Dynamics benefit from protectionist policies, downstream industries—such as construction and automotive manufacturing—face margin compression due to higher input costs [6]. The NAM survey revealed that 89% of manufacturers reported tariff-related cost increases averaging 7.7%, with 61.8% citing negative impacts on exports [4]. This policy-driven volatility has prompted equity managers to favor companies with stable business models and minimal international exposure [6].

Monitoring Key Indicators: The 10-2 Year Yield Spread

Investors must closely track the 10-2 year Treasury yield spread, a critical recession signal. In Q2 2025, the spread steepened to 52 basis points as market focus shifted from monetary policy to fiscal concerns, including the "One, Big, Beautiful Bill Act" [3]. A steep yield curve historically indicates growth optimism, but a future inversion could signal a downturn, necessitating a defensive rebalancing [3].

Strategic Rotation: Balancing Defense and Growth

The path forward requires a strategic balance:
1. Defensive Allocations: Overweight utilities and consumer staples to hedge against margin pressures and policy uncertainty.
2. Cyclical Exposure: Position in AI infrastructure, machinery, and energy sectors to capitalize on nearshoring and automation trends.
3. Tariff Hedging: Diversify into emerging markets with strong domestic demand, such as Japanese banks and Brazilian equities [6].

While the manufacturing PMI signals fragility, the interplay of AI, infrastructure, and policy-driven shifts offers a roadmap for resilience. Investors who navigate this duality with agility will be well-positioned to weather near-term volatility while capturing long-term growth.

Source:
[1] Manufacturing PMI® at 48.7%; August 2025 ISM® Manufacturing PMI® Report [https://www.prnewswire.com/news-releases/manufacturing-pmi-at-48-7-august-2025-ism-manufacturing-pmi-report-302543264.html]
[2] United States Manufacturing PMI [https://tradingeconomics.com/united-states/manufacturing-pmi]
[3] Navigating U.S. Manufacturing Weakness: Sector Rotation Strategies [https://www.ainvest.com/news/navigating-manufacturing-weakness-sector-rotation-strategies-2025-2508/]
[4] 2025 Second Quarter Manufacturers' Outlook Survey - NAM [https://nam.org/2025-second-quarter-manufacturers-outlook-survey/]
[5] TRUMP EFFECT: A Running List of New U.S. Investment in President Trump’s Second Term [https://www.whitehouse.gov/articles/2025/08/trump-effect-a-running-list-of-new-u-s-investment-in-president-trumps-second-term/]
[6] Trade War Winners: Who Benefits from Tariffs as Deadline Looms [https://get.ycharts.com/resources/blog/2025-who-benefits-from-tariffs/]