US factory activity eases off four-year high; input prices remain elevated

WASHINGTON - U.S. manufacturing activity slowed in June after scaling a 4-year high in the prior month, likely as some of the lift from businesses front-loading orders to avoid shortages and higher prices caused by the Middle East conflict faded.

Despite the moderation reported by the Institute for Supply Management on Wednesday, manufacturing remained underpinned by an artificial intelligence investment boom. More manufacturers in the ISM survey said they were hiring, and the share mentioning the U.S.-led war with Iran and pricing volatility as an issue for their companies declined notably from May.

The U.S. and Iran have agreed to a ceasefire, with the fragile truce pushing oil prices back to pre-war levels.

"The rush of activity aimed at getting ahead of supply-chain disruptions linked to the conflict in the Middle East showed signs of fading in June," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. "But the big picture is that the manufacturing sector still seems to be in relatively good health."

The ISM said its manufacturing PMI slipped to 53.3 last month from 54.0 in May, which was the highest reading since May 2022. A reading above 50 indicates expansion in manufacturing, which accounts for 9.4% of the economy. Economists polled by Reuters had forecast the PMI unchanged at 54.0.

Still, manufacturing has grown for six consecutive months as the AI spending spree blunted some of the hit on factories from the conflict. Fourteen industries reported growth last month, including electrical equipment, appliances and components, machinery, textile mills, primary metals as well as computer and electronic products.

Though views from respondents remained negative, ISM's Manufacturing Business Survey Committee Chair Susan Spence said the Iran war was mentioned in 31% of the comments and 50% of respondents said pricing volatility was an issue for their companies. That compared to 42% and 57%, respectively, in May.

Mentions of tariffs dipped to 17% from 18% in May. Some of the respondents highlighting the impact of the war were makers of chemical products who said the conflict had "impacted pricing in every category of raw materials." Manufacturers of computer and electronic products said the war was "resulting in a more conservative approach to capital expenditures."

Some producers of miscellaneous products said they remained concerned "about ongoing ripple effects even when the Strait (of Hormuz) reopens." Food, beverage and tobacco products manufacturers said "input costs remain elevated across key categories, driven largely by Middle East conflict impacts and ongoing tariff uncertainty."

Tariffs were also singled out by some transportation equipment manufacturers for continuing to "destroy our profitability and demand as we have to raise prices to deal with this gigantic tax." Though the U.S. Supreme Court struck down President Donald Trump's sweeping import duties, the White House replaced them with a global tariff.

Stocks on Wall Street were mostly higher. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.

FACTORY INVENTORIES REBOUND

The ISM survey's new orders measure fell to a still-lofty 56.0 last month from 56.8 in May. Order backlogs also decreased after rising in the prior month, while exports contracted.

Factory inventories, however, rebounded after a prolonged period of contraction. Supply chains improved somewhat, likely because of the ceasefire. The survey's supplier deliveries index eased to 57.4 from 60.6 in May, with a reading above 50 indicating slower deliveries.

The slight improvement slowed the pace of increase in inflation at the factory gate. The survey's prices paid for inputs measure dropped to a still-elevated 73.0 from 82.1 in May. But prices are likely to remain high as AI spending raises the cost of goods like semiconductors and electronics.

The ISM reported continued price increases for a wide range of goods last month, including aluminum, copper, electrical components, electronic components as well as memory components and packaging materials. Electrical components, electronic components, memory chips and semiconductors were among the products that remained in short supply in June.

"Lower energy prices are slowing the increase in raw material costs but rising costs are still an issue for the vast majority of manufacturing industries and the job of monetary policy is to prevent these increases from spilling over into the broader economy," said John Ryding, chief economic advisor at Brean Capital.

Financial markets expect the Federal Reserve to raise interest rates this year because of inflation. The U.S. central bank this month left its benchmark overnight interest rate in the 3.50%-3.75% range, but updated quarterly projections showed policymakers expected to raise borrowing costs this year.

Factory employment remained depressed in June. Since January 2023, the ISM's manufacturing employment index has contracted in 40 of the 41 months. But there were some rays of hope in the survey. About 64% of respondents reported they were hiring, up from 50% in May.

A Reuters survey of economists expects a moderate increase in manufacturing employment in June when the government releases its closely watched employment report on Thursday. Overall nonfarm payrolls are forecast to have risen by 110,000 after a gain of 172,000 in May. The unemployment rate is forecast to hold steady at 4.3% for a fourth straight month.

The labor market has stabilized after stumbling last year. Private employment increased by 98,000 jobs in June after an unrevised gain of 122,000 in May, the ADP National Employment Report showed on Wednesday. A third report from global outplacement firm Challenger, Gray and Christmas showed layoffs planned by U.S.-based employers dropped 53% to 45,849 in June.

Employers announced 443,604 job cuts in the first half of the year, down 40% compared to the same period last year.

"The pace of layoffs cooled considerably in June, similar to plans last June, and as is typical for summer months," said Andy Challenger, chief revenue officer at Challenger, Gray and Christmas. "That said, the cuts we are seeing remain concentrated in technology, and artificial intelligence continues to reshape how companies think about headcount."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci )

Copyright Reuters or USA Today Network via Reuters Connect

This story was originally published July 1, 2026 at 12:58 PM.