US manufacturing activity accelerated in October, supported by stronger domestic demand, although rising production costs and persistent supply chain disruptions continued to put pressure on businesses. The latest figures from the Institute for Supply Management (ISM) indicate continued expansion across the manufacturing sector, but business confidence remains weak amid economic uncertainty, trade tensions and elevated energy prices.
The improvement comes as manufacturers face increasing costs for commodities, including energy, partly driven by the ongoing US-Israeli conflict with Iran. Renewed trade tensions between the United States and Canada have also added to business challenges, limiting companies’ ability to plan and make long-term investment decisions.
These inflationary pressures are also affecting consumer confidence, with rising living costs contributing to widespread dissatisfaction with President Donald Trump’s economic policies. Economists warn that higher interest rates and declining inflation-adjusted household incomes could weigh on manufacturing activity in 2027, particularly in industries that are not benefiting from increased artificial intelligence (AI) investment.
US Manufacturing Activity Accelerates in October
According to the ISM, the Manufacturing Purchasing Managers’ Index (PMI) increased to 55.5 in October, up from 54.5 in September. The result exceeded economists’ expectations, who had forecast the index to remain unchanged at 54.5.
A PMI reading above 50 indicates expansion in manufacturing activity. The index has remained above this threshold throughout the year, demonstrating continued growth in a sector that accounts for approximately 9.4% of the US economy.
Factory production also recorded a significant improvement. The production index increased by 2.3 percentage points to 59, marking its highest reading since November 2021. Factory inventories also increased, following five consecutive quarters of declines in business inventories.
However, economists caution that the manufacturing recovery may face challenges as borrowing costs rise and financial conditions tighten. Although AI-related investment continues to support certain industries, slower investment growth and weaker demand across non-AI manufacturing segments could limit broader expansion.
Manufacturers Remain Concerned About Economic Conditions
Despite stronger manufacturing activity, business sentiment continued to deteriorate for the third consecutive month. Susan Spence, chair of the ISM Manufacturing Business Survey Committee, reported that approximately 66% of comments from survey respondents were negative.
Manufacturers identified pricing volatility as their primary concern, followed by longer supplier lead times, tariffs and geopolitical tensions. Several businesses also expressed difficulties making long-term decisions because of uncertainty surrounding government policies and economic conditions.
Manufacturers in the fabricated metal products industry reported that customers were reluctant to commit to anything beyond short-term agreements. Meanwhile, chemical manufacturers highlighted inflation and rising sourcing costs as major concerns heading into 2026.
Transportation equipment manufacturers also reported that customers were delaying purchasing decisions because of high equipment prices. At the same time, growing demand from AI infrastructure and data center construction is putting additional pressure on the availability and pricing of essential industrial components.
Supply Chain Disruptions Keep Production Costs Elevated
Supply chain constraints remain another significant challenge for US manufacturers. The ISM Supplier Deliveries Index increased slightly to 59.1 in October from 59.0 in September. Readings above 50 indicate slower supplier deliveries, marking the 11th consecutive month of delivery delays across the manufacturing sector.
Several materials and components remain in short supply, including aluminum, copper, electrical and electronic components, and memory chips. Growing demand from semiconductor manufacturers, AI data centers and government and defense industries is further intensifying competition for these resources.
Although the ISM’s Prices Paid Index eased to 75.2 in October from 77.9 in September, it remained elevated. Manufacturers continued reporting higher prices for aluminum, copper, diesel fuel, electronic components and memory products.
The persistent increase in input costs suggests that inflationary pressures across the manufacturing sector remain significant. The latest government figures also showed that the Personal Consumption Expenditures (PCE) Price Index increased 3.6% year over year in September, remaining well above the Federal Reserve’s 2% inflation target.
Federal Reserve Faces Continued Inflation Pressure
Rising manufacturing costs and persistent inflation could complicate the Federal Reserve’s monetary policy decisions. The central bank maintained its benchmark overnight interest rate within the 3.75% to 4.00% range at its latest meeting, while acknowledging that inflation remains elevated.
Economists expect the Federal Reserve could increase borrowing costs again in December as policymakers attempt to contain inflation. Higher interest rates could further increase financing expenses for manufacturers, potentially affecting business investment, production capacity and future hiring.
Manufacturing employment continued to expand in October, although at a slower pace than in September. The ISM Employment Index edged down to 52.4 from 52.7, remaining above economists’ expectations of 52.0.
According to economists at BMO Capital Markets, the combination of stronger factory activity and elevated input costs presents a challenge for the Federal Reserve. Persistent supply constraints and rising production expenses suggest that inflationary pressures remain far from under control.
Looking ahead, the manufacturing sector’s ability to sustain growth will depend on how businesses navigate higher borrowing costs, commodity price volatility and ongoing supply chain disruptions. While AI-related investment continues to provide opportunities for certain industries, broader manufacturing growth could face increasing pressure if inflation remains elevated into 2027.
