AI Supply Chain Shines! US ISM Manufacturing Index Soars to 55.6 in July, Highest in Over 4 Years

US manufacturing activity expanded at its fastest pace in over four years in July, with new orders, production, and employment all heating up, reflecting sustained demand from artificial intelligence (AI), semiconductors, and defense sectors supporting factory conditions. However, another manufacturing survey showed stagnant growth, while Middle East conflicts, tariffs, and supply chain delays pushed up costs, highlighting a highly fragmented recovery in US manufacturing.

The Institute for Supply Management (ISM) announced on Monday (August 3) that its July manufacturing index rose to 55.6 from 53.3 in June—exceeding market expectations of 54.0 and marking the highest level since May 2022. The index has now remained above 50, the threshold indicating economic expansion, for seven consecutive months.

Key components of the US ISM Manufacturing Index for July (50 is the boom-bust line):

New Orders Index: 56.7 (previous: 56.0) Production Index: 58.5 (previous: 52.2) Employment Index: 52.8 (previous: 49.7) Supplier Deliveries Index: 58.9 (previous: 57.4) Inventories Index: 51.2 (previous: 51.4) Customers' Inventories Index: 40.7 (previous: 42.3) Prices Index: 71.1 (previous: 73.0) Backlog of Orders Index: 55.0 (previous: 50.5) Exports Index: 53.0 (previous: 48.5) Imports Index: 55.7 (previous: 52.9)

The Production Index climbed to 58.5, the highest since late 2021; the New Orders Index increased from 56.0 to 56.7, signaling continued strengthening demand. The Employment Index rebounded from 49.7 to 52.8—the highest since August 2022—and marks the first time manufacturers have added workers since September 2023.

Manufacturing accounts for about 9.4% of the US economy and has been supported this year by resilient consumer demand, business investment, defense spending, and the AI infrastructure boom. Companies are also accelerating procurement to avoid price hikes and shortages due to tariffs and potential US-Iran conflict.

Nearly all manufacturing industries grew in July except chemicals, with printing, apparel, and electrical equipment sectors particularly strong. The Export Orders Index reached its highest since March 2022, while the Imports Index posted its best performance since June 2021.

Despite broad strength in ISM data, S&P Global’s July US Manufacturing Purchasing Managers’ Index (PMI) stood at just 53.9, unchanged from June and at a three-month low—sharply contrasting with ISM's multi-year high.

Survey responses reveal a 'two worlds' scenario in US manufacturing. AI, semiconductor, electronics, and machinery firms report robust demand from data centers, chips, and defense; meanwhile, metal, transportation, chemical, and consumer-related industries face weak demand, rising tariff costs, geopolitical risks, and pricing chaos.

Simply put, the AI supply chain is booming, but other manufacturing sectors are not keeping pace. S&P Global’s chief business economist Williamson noted that while the overall PMI remains stable, underlying details show warning signs of weakening future growth momentum.

Production growth slowed notably in July, and new business growth weakened for the third consecutive month, partly because inventory restocking momentum declined after companies made large preventive stockpiles in Q2. Falling exports, supply delays, and consumer resistance to high prices further suppressed growth.

Middle East conflicts are placing additional strain on manufacturing supply chains. The ISM Supplier Deliveries Index rose from 57.4 to 58.9—above 50 indicates slower delivery times—showing longer lead times for raw materials and components. While delivery delays often reflect strong demand, this time they also reflect war-induced supply constraints.

The ISM Prices Index for raw materials fell from 73.0 in June to 71.1, the lowest in five months, yet still far above early-year levels, indicating persistent inflationary pressure on factories. Tariffs and Middle East conflicts are pushing up costs for oil-related products, forcing firms to raise prices to maintain profits or absorb costs through higher productivity.

S&P Global’s survey also shows manufacturing business confidence has dropped to its lowest since October last year, reflecting growing caution among firms about the near-term outlook. Even though inventories have declined for five consecutive quarters and still have room to rebound, whether manufacturing can sustain rapid growth depends on whether AI-driven demand spreads to other industries.

The Federal Reserve (Fed) held interest rates steady at 3.50%–3.75% last week, but three officials advocated a 25-basis-point rate hike. With war and tariffs tilting inflation risks upward, rising manufacturing demand and persistently high costs may further complicate the Fed’s policy decisions.