U.S. Factory Activity Contracts Again in May as Tariffs and Inflation Bite

Jay's InsightMonday, Jun 2, 2025 11:08 am ET
2min read

The ISM Manufacturing PMI for May came in at 48.5, slightly below expectations of 49.5 and down modestly from April’s 48.7. The reading marks the third straight month of contraction and reaffirms that U.S. factory activity continues to struggle with soft demand, elevated input prices, and trade-related uncertainty. While the overall economy remains in expansion mode, the manufacturing sector is clearly under pressure.

Subindex Breakdown:

  • New Orders remained in contraction at 47.6, a slight improvement from April’s 47.2, but still reflecting demand softness.
  • Production ticked up to 45.4 from 44.0, signaling a slower pace of decline, though output continues to be cut as manufacturers adjust to weaker activity.
  • Employment stayed in contraction at 46.8, as layoffs edged out hiring for the fourth straight month, with firms citing faster headcount reductions over attrition.
  • Supplier Deliveries rose to 56.1, consistent with slowing deliveries—typically a bullish sign, but in this context more tied to logistical bottlenecks than robust demand.
  • Inventories fell back into contraction at 46.7 from 50.8, with respondents citing post-tariff pull-forward activity as a driver of recent declines.

Prices Paid – Inflation Watch: The Prices Index stayed hot at 69.4, only slightly below April’s 69.8. Input cost inflation remains a top concern for buyers, with aluminum, steel, and electrical components all cited as higher in price. While price growth slowed fractionally, the stickiness of input inflation could complicate the Fed’s disinflation narrative.

Tariff & Trade Impact: The report featured heavy commentary around tariffs. Multiple respondents noted worsening supply chain disruptions tied to U.S. tariff policy, particularly on steel, electronics, and rare earth components. Several mentioned reconfiguring supply chains or struggling with margin pressure from price pass-throughs. The Imports Index collapsed to 39.9, while New Export Orders fell to 40.1 — both signaling sharp deterioration in global trade flows.

Momentum Check & Sector Divergence: Just 2 of the 6 largest manufacturing industries expanded in May, and only 7 of 18 sectors reported growth overall. Key laggards included Transportation Equipment, Chemicals, and Primary Metals — all tariff-sensitive. Demand is increasingly domestic, as export volumes continue to weaken. Notably, only 5% of manufacturing GDP now sits below the critical 45 PMI threshold — down sharply from 18% in April, a minor silver lining suggesting broad-based deterioration has slowed.

Macro Market Takeaway: The soft report may nudge expectations toward additional Fed cuts, especially given cooling inventories and weak international trade readings. Treasury yields were little changed immediately post-release, though markets will continue watching whether industrial softness bleeds into services or labor data. The elevated Prices Paid reading keeps the inflation-versus-growth tradeoff front and center for policymakers.

In sum, May’s ISM report paints a picture of a sector in retreat, but not free fall. Momentum remains weak, tariff overhangs persist, and while input cost pressures haven’t yet worsened, they are nowhere near resolved. The battle between industrial resilience and macro headwinds looks likely to continue into summer.