U.S. October ISM Manufacturing PMI rises to 55.5, beating market expectations; production growth hits a near five-year high

U.S. manufacturing expansion accelerated in October, with production activity posting the strongest growth in nearly five years, indicating that U.S. manufacturing is continuing to recover after a prolonged slump. However, despite strong production and orders, manufacturers remain concerned about inflationary pressures, tight raw material supply, and geopolitical uncertainty. Data released Monday by the Institute for Supply Management (ISM) showed that the October ISM Manufacturing Purchasing Managers' Index (PMI) rose 1 percentage point from September to 55.5, the second-highest level in more than four years, beating all but one economist's forecast in a media survey. A reading above 50 indicates that manufacturing is in expansion territory. Among the sub-indexes, the October manufacturing production index rose to its highest level since late 2021, indicating a clear acceleration in factory production activity. The new orders index, which measures demand conditions, also rose to its highest level since July and continued to remain in expansion territory, reflecting still-solid manufacturing demand. With that, the U.S. ISM Manufacturing PMI has now remained in expansion territory for 10 consecutive months, reversing an industry downturn that had persisted for about three years. The continued manufacturing recovery has also driven hiring. Data showed that U.S. factory employment rose in October for the fourth consecutive month, the longest streak of consecutive gains since early 2022, indicating that companies are gradually expanding their workforces to meet growing production needs. The strong performance of U.S. manufacturing was mainly driven by economic growth, resilient consumer demand, and continued increases in business investment. Previously released data showed that the U.S. economy grew in the third quarter at its fastest pace in a year, with business investment in areas such as data centers, artificial intelligence (AI) infrastructure, and industrial equipment serving as an important driver. By industry, 12 manufacturing industries reported growth in October, including electrical equipment, machinery, and computer and electronic products. In contrast, three industries contracted: printing, paper products, and nonmetallic mineral products. It is worth noting that although the overall manufacturing data were strong, companies' views on the business environment have continued to deteriorate in recent months. Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said on a conference call with reporters that the main challenges manufacturers currently face remain inflationary pressures and constrained raw material supply, with the ongoing Iran war and tariff-related trade disputes further exacerbating these problems. Company feedback showed that different industries are bearing varying degrees of cost pressure. One chemicals industry respondent said that "negative, inflationary, loss" were the three words that best described the company's procurement situation in 2026. Although sales are fair, cost pressures mean this will not be a particularly good year. Respondents in the computer and electronic products industry noted that demand for global capital scientific research instruments has slowed somewhat due to persistent uncertainty in the Middle East, Eastern Europe, and the Chinese market. Meanwhile, the U.S. midterm elections and the outlook for research funding policy have also affected customers' purchasing decisions, prompting companies to focus more on utilizing existing equipment rather than buying new products. Fabricated metal products companies said that Washington's economic policies continue to affect the business environment, and customers are reluctant to make long-term purchasing commitments due to high uncertainty. In addition, Canada-related tariff measures continue to hit small U.S. businesses that sell products into the Canadian market. The food, beverage, and tobacco industry faces multiple pressures, including raw material price volatility, rising diesel costs, and a shortage of truck drivers, further increasing transportation and procurement costs. However, AI infrastructure buildout continues to bring strong demand to some manufacturing companies. One machinery industry respondent said that demand from the semiconductor and government defense sectors is growing rapidly, and the company is working hard to cope with a sudden increase in orders. "The wave of demand we have been waiting for has finally arrived," but global supply chains are also under pressure as a result, with longer lead times, higher prices, and even renewed supply delays for some products similar to those during the pandemic. Another machinery manufacturer said that demand from data centers, critical infrastructure, and municipal water facility upgrades continues to drive business growth, and demand from the mining industry also remains strong. Another manufacturer noted that all raw materials needed for AI and data center construction are facing tight supply and rising prices. This company feedback indicates that while the AI investment boom is driving manufacturing production and order growth, it is also exacerbating supply-demand imbalances in some raw materials and industrial products. At the same time, U.S. manufacturing still faces considerable inflationary pressure. The inflation gauge favored by the Federal Reserve rose 3.6% year on year in September, well above the central bank's 2% target. The ISM report showed that manufacturers still faced higher raw material purchase prices and longer supplier delivery times in October. Although the manufacturing prices index fell to 75.2 from September, it remained above the level before the Middle East conflict broke out, meaning that corporate cost pressures have not yet been fundamentally alleviated. Bloomberg Economics economist Andrew Sacher said that U.S. manufacturing entered the fourth quarter with stronger-than-expected momentum, while industry inflationary pressures eased slightly. He noted that the October ISM report did not show that the recent volatility in AI-related stocks stemmed from weakening real economic activity. Overall, the October performance of U.S. manufacturing reflects that economic demand remains highly resilient, especially as AI, data centers, and industrial investment continue to provide growth momentum for manufacturing. However, elevated raw material prices, supply chain bottlenecks, and trade policy uncertainty may still limit further business expansion and keep inflationary pressures in place for some time to come.