In the first look at US manufacturing since the beginning of the US-Israel war on Iran, manufacturing activity ticked upward again in March to its strongest level in nearly four years, signaling renewed industrial momentum with the caveat that, below-the-fold, purchasing managers expressed deep concern over building price pressures and exposure to geopolitical risks to supply.
The manufacturing purchasing managers’ index from the Institute of Supply Management jumped to 52.7 last month, the highest reading since 2022, putting the index firmly in expansion territory. The report marks the third consecutive month of steady growth, preceded by, with just one exception, three years of sluggish numbers.
But beneath the headline strength, cracks from the Iran war are beginning to show. The prices paid index spiked sharply to 78.3, a significant jump from February and an alarm bell for a global economy just beginning to recover from the lifting of President Trump’s IEEPA tariffs. New orders, while up overall, ticked down for the second straight month, after January’s first positive numbers in half a year.
“Sometimes just looking at the headline doesn’t give you the accurate story. You really have to read what respondents are saying, and a lot of that reflected uncertainty and negative impacts on their businesses,” said Jennifer Lee, Senior Economist and Managing Director of BMO Capital Markets. “When you dig into the details, it’s not exactly the kind of increase you would have hoped for.”
The majority of manufacturers quoted in the report expressed anxiety over prices and supply constraints, though they said that business was up tepidly overall. The resilient growth and inflation trends add new upward pressure on rates for officials at the Federal Reserve, which to the dissatisfaction of President Donald Trump. They may face what has become an increasingly-politicized standoff with Trump, who has pushed for lower rates since taking office.
The report lands against an increasingly volatile global backdrop. Rising tensions tied to uncertainty around Iran’s retaliatory blockage of the Strait of Hormuz have heightened concerns over sensitive supply chain flows. The war has already threatened industrial inputs like helium, needed for vital chip production inputs, and fertilizer, just as planting season hits. An Iranian missile strike on Aluminum Bahrain caused a 5% jump in aluminum futures as manufacturers reported “too high” aluminum prices for the 28th-straight month.
And higher energy costs remain a central pressure point for U.S. manufacturers, even beyond direct exposure to foreign oil flows.
“The U.S. doesn’t import much energy from the Persian Gulf anymore, but that doesn’t mean we’re insulated,” said Chris Low, a chief economist at FHN Financial. “U.S. manufacturers still rely heavily on Asian suppliers, and they’re facing much higher energy costs.”
One such manufacturer is California Machine Specialties, which produces precision metal parts like heatsinks for the defense industry, including the US Navy. Even with an expected increase in orders from the war, Anand Jagani, president and director of quality for the company, said he remained anxious.
“I’m anticipating there would be a longer lead time to get the raw materials, and higher costs for the processes we use. Both of those are going to push up our overall costs,” said Jagani. “A lot of our products depend on energy-intensive processes. That raises our costs, and we can’t always pass that on to customers.”
Companies like California Machine Specialties operate with long-term contracts and face cuts to profit with increasing costs. They will soon contend with a backlog of orders, but it may not be the positive sign usually signaled by backlogs. Higher prices and firm contracts will threaten their bottom line.
“Business can go up and down a little bit here and there. It doesn’t bother me too much. What especially bothers me is not having peace in the world.”