US Manufacturing Activity Nears Stagnation While Prices Jump

The U.S. manufacturing sector is facing a challenging environment as activity nears stagnation while prices continue to rise. According to the Institute for Supply Management (ISM), the manufacturing purchasing managers' index (PMI) ticked down to 50.3 in February from 50.9 in January, remaining just above the 50-mark that separates growth from contraction. This slight decline comes amidst a backdrop of rising input prices, driven by new or threatened tariffs by the Trump administration.



The prices paid index for U.S. manufacturers rose by 1.9 points from the previous month to 54.9 in January of 2025, according to data from the ISM. This increase reflects the persistent inflationary threat for goods producers even before tariffs passed by the new U.S. Presidential administration. The ISM Manufacturing Prices Paid index averaged 60.40 points from 2003 until 2024, reaching an all-time high of 92.10 points in June of 2021 and a record low of 17.10 points in December of 2008.

The rise in prices is a concern for manufacturers, as it can lead to reduced demand and increased production costs. This, in turn, can negatively impact the overall economic growth. The U.S. manufacturing sector has been in structural decline since the late 1970s, with employment and the number of businesses decreasing over time. The sector's contribution to GDP has also declined, with the service sector now dominating the U.S. economy.



The stagnation of U.S. manufacturing activity can be attributed to several primary factors, including insufficient technological investment, particularly from the federal government. This has allowed other countries to become more competitive in the global manufacturing landscape. For instance, China installs 12 times more manufacturing robots than would be expected given its wage levels, while the United States installs only 73 percent as many. Additionally, Japan invests 55 times more in manufacturing support for small and medium-sized enterprises than does the United States, while Germany invests 6 times more.

Recent geopolitical events, such as trade disputes and supply chain disruptions, have also influenced the stagnation of U.S. manufacturing activity. The U.S.-China trade war led to increased tariffs on Chinese goods, making them more expensive for U.S. consumers and businesses. This, in turn, reduced demand for these goods and negatively impacted U.S. manufacturing output. Additionally, the COVID-19 pandemic disrupted global supply chains, leading to shortages of raw materials and components, which further hindered U.S. manufacturing production. Furthermore, the war in Eastern Europe has exacerbated these issues by causing further disruptions in global supply chains and increasing uncertainty for businesses.

To boost productivity and maintain competitiveness in the global manufacturing landscape, the U.S. manufacturing sector must embrace technological advancements such as automation and AI. However, insufficient investment in these technologies has led to stagnation in productivity growth. To address this issue, experts recommend a temporary 25 percent investment tax credit lasting six years to spur a surge of investment in new machinery, equipment, and software. Additionally, creating a network of five or six automation institutes across the nation that focus on helping U.S. manufacturers automate work and boost productivity can provide training and support for current and future workers to ensure skilled personnel are available to operate, maintain, troubleshoot, and repair advanced automation technologies as they are implemented.

In conclusion, the U.S. manufacturing sector is facing a challenging environment as activity nears stagnation while prices continue to rise. To address these issues, the sector must embrace technological advancements and increase investment in new technologies and automation to boost productivity and maintain competitiveness in the global manufacturing landscape.