The manufacturing sector was boosted by geopolitical anxieties in April, as conflict in the Middle East raised supply orders, but higher costs and energy prices are dampening the sector’s future outlook.
The Institute for Supply Chain Management’s (ISM) latest Purchasing Managers Index remained in expansion at 52.7 percent, unchanged from March, slightly lower than economists’ expectations of 53 percent.
The high rating is tied to an increase in businesses stocking inventories to lock in lower prices, driven by future worries about fuel prices, supply chain constraints and material shortages as the U.S.’s war in Iran drags on with no clear end. Larger macroeconomic factors, including high costs of labor and rising energy rates, pose a longer-term threat to the sector’s health and growth.
“A lot of demand is being pulled forward; the increase is reflecting from loading and spending,” explained Oscar Munoz, a U.S. macro strategist at TD Securities.
The war’s impact on manufacturing stretches from higher costs from international suppliers to transportation costs. Energy prices have spiked since the conflict began in February; on Thursday, Brent crude oil was trading above $120 per barrel and the average price of gas nationally hit $4.30 a gallon.
“The surge in manufacturing activity in April is not the cause for cheer that at first glance it suggests,” Chris Williamson, chief business economist at S&P Global Market Intelligence, wrote in a note. “The overall inflation picture is now the most worrying for almost four years.”
The PMI Price Index has continued to climb in April, reaching 84.6 percent, 6.3 percentage points higher from March and nearly 24 points higher compared to the year prior. New Orders grew to 54.1 percent, while Production declined to 54.4 percent, both signalling overall growth. However, if and when the Strait of Hormuz reopens, economists anticipate prices and new orders to re-stabalize.
A majority of respondents to the ISM survey expressed negative sentiments, with a focus on the war and tariffs. The Supreme Court struck down some of the Trump Administration’s tariffs in February, and Munoz anticipates tariff-driven inflation rates to continue through the first half of the year.
“Our business remains strong and stable, but there are a lot of concerns in the geopolitical arena,” one manufacturer wrote in the survey’s comments. “If the Iran conflict persists, the impact on market pricing and supply continuity could be extreme.”
Supply chain congestion also produced a higher Supplier Delivery Index, with the rating registering at 60.6 percent. Delivery times have been slowing over the past five months, which indicates increased customer demand and improvement in the economy as a whole.
Uncertainty in geopolitics has been an asset to some supply chain members, such as third-party logistics provider Komar Distribution Services. The group operates several warehouses in Savannah, Georgia that are licensed as Foreign-Trade Zones (FTZ), meaning importers don’t pay tariffs on cargo until the point of sale.
KDS’ sales director Eric Ritchey said smaller companies or those with international clients have been particularly interested in FTZ warehousing, helping them avoid additional overhead in the event of new or evolving tariffs. For KDS, this means additional revenue and for customers, some stability.
“When we sign new clients, just that peace of mind of just knowing, hey, if something did happen again, they can easily activate Foreign Trade Zone [is valuable], ” Ritchey said.
Employment has remained in contraction for 31 months now, highlighting firms’ desire to maintain low headcounts for cost efficiencies. In the past, manufacturers may have passed on higher supply chain rates to wholesalers or consumers, but now, businesses are looking to absorb those costs, which can mean cutting payrolls, Munoz said.
“It was quite clear in this report, business executives are maintaining headcounts and if they need to adjust, they are downsizing with layoffs and attrition,” said Stan Shipley, senior managing director and economist at Evercore, ISI.
Four of the six largest manufacturing industries had strong returns in April, including transportation equipment, machinery, computer and electronic products and chemical products. Munoz anticipates any business related to AI including data centers or chips, will continue to see positive returns, even beyond the war-related surge.
“But outside of that, the rest [of the sector] is moving sideways,” Munoz said.
