U.S. manufacturing activity expanded at a slightly slower pace in September, while factory input prices rose sharply.
The latest ISM Manufacturing PMI came in at 54.5, down marginally from 54.6 in August and below economists’ expectations of 54.8. Any reading above 50 indicates expansion in the manufacturing sector.
U.S. Manufacturing Growth Eases
The September reading means U.S. manufacturing remained in expansion territory for the ninth consecutive month.
However, the slight decline in the headline index suggests that the pace of growth moderated compared with August.
The survey also showed that manufacturers remain concerned about rising costs and uncertainty surrounding trade and energy markets.
Factory Prices Jump Sharply
The biggest development in the latest ISM report was the increase in input prices.
The ISM Prices Index surged to 77.9 in September, up from 71.1 in August. The figure also came in well above expectations of 72.9.
According to the ISM survey, higher steel and aluminum costs, tariffs on imported goods and rising petroleum-related prices contributed to the increase.
The sharp rise in prices could add to concerns that inflationary pressures remain elevated across the U.S. economy.
Tariffs and Energy Costs Pressure Manufacturers
Manufacturers highlighted several factors behind the increase in costs.
Tariffs continued to affect imported goods and cross-border expenses, while higher petroleum and fuel prices added pressure throughout supply chains.
The ISM report showed that 58.6% of respondents reported paying higher prices in September, compared with 46.2% in August.
Diesel, freight, electronic components, semiconductors and several metals were among the products reported as increasing in price.
Factory Backlogs Rise
At the same time, the Backlog of Orders Index climbed to 56.4, up sharply from 51.8 in August.
The increase suggests that manufacturers are dealing with stronger order pipelines in some industries.
Demand has been particularly notable across computer and electronic products, machinery and other sectors connected to technology investment.
Heavy spending on artificial intelligence infrastructure and data centers has also supported demand for semiconductors and electronic equipment.
Supply Constraints Add to Price Pressures
Strong demand has created supply challenges for certain products.
The ISM survey identified shortages in areas including electronic components, memory products, printed circuit boards and some metals.
Longer delivery times and higher transportation costs are also creating challenges for manufacturers.
Food producers continue to face elevated commodity costs as well, adding another source of inflation pressure.
Federal Reserve Outlook Remains in Focus
The latest manufacturing report arrives as investors assess the outlook for Federal Reserve interest rates.
The Fed raised its target rate by 25 basis points on September 17, bringing the federal funds target range to 3.75%-4.00%.
Recent inflation data has been somewhat softer than expected, while economic growth has remained resilient.
However, the sharp rise in manufacturing input prices could complicate expectations for future monetary policy.
Inflation Becomes the Key Market Concern
The September ISM report suggests that the U.S. manufacturing sector remains relatively healthy, but inflation has become a more significant concern.
While the headline Manufacturing PMI slipped only slightly to 54.5, the jump in the Prices Index to 77.9 points to growing cost pressures.
Investors will now watch upcoming inflation, employment and manufacturing data for further clues about the U.S. economy and the Federal Reserve’s next policy moves.
