American factories expanded activity at the fastest pace in nearly four years in March, shrugging off a war-driven surge in input costs that has dominated headlines but failed to dent the sector’s momentum.
The Institute for Supply Management’s Manufacturing PMI registered 52.7 in March, up from 52.4 in February, marking the third consecutive month of expansion and the strongest reading since 2022. Separately, the S&P Global US Manufacturing PMI rose to 52.3 from 51.6, extending its own expansion streak to eight months. The two surveys, which use different panels and methodologies, converged on the same conclusion: manufacturing is growing, and the pace is picking up.
The expansion was powered by domestic demand. S&P Global reported that growth was “principally driven by higher domestic demand,” with new orders and production both accelerating. The ISM’s Production Index climbed to 55.1, its fifth straight month in expansion, while new orders held firmly in growth territory at 53.5. Backlogs of orders also continued to build. Customer inventories have registered “too low” for 18 consecutive months, pointing to sustained production needs ahead.
Thirteen of sixteen manufacturing industries tracked by ISM reported growth in March, up from the prior month, and the share of manufacturing GDP in contraction fell from 21 percent in February to 16 percent. Among the six largest manufacturing industries, four expanded, including transportation equipment, computer and electronic products, machinery, and chemical products.
The resilience is all the more notable given the cost environment. ISM’s Prices Index surged 7.8 points to 78.3, its highest level since June 2022, driven overwhelmingly by the war in Iran and the effective closure of the Strait of Hormuz. Among negative comments from ISM panelists, roughly 40 percent cited the Middle East conflict, compared with about 20 percent mentioning tariffs. Manufacturers reported spiking feedstock costs, shipping blockages, container delays, and soaring energy prices rippling through global supply chains.
S&P Global’s survey told a similar story on costs, with input price inflation reaching its highest level since last August and supplier delivery times deteriorating to their worst since October 2022.
But manufacturers and policymakers alike expect the cost pressures to prove temporary. Chris Williamson, chief business economist at S&P Global Market Intelligence, said the data pointed to “encouraging resilience for US manufacturing in the face of the outbreak of war in the Middle East,” adding that business confidence “also indicates that producers anticipate only a short-term and modest impact from the war, which is clearly uncertain.”
Federal Reserve Chair Jerome Powell struck a similar note at Harvard University on Monday. “Energy shocks have tended to come and go pretty quickly,” Powell said, reinforcing the view that the central bank is inclined to look past the war-driven cost surge rather than tighten policy in response.
Employment in manufacturing continued to reflect low growth in the labor force, largely due to changes in immigration policy. On Wednesday, economists at the Federal Reserve Bank of Dallas estimated that the current “break-even” rate of job growth—the rate required to keep unemployment stable—is now negative. ISM’s Employment Index contracted for a 30th straight month at 48.7, with 55 percent of panelists reporting that managing headcounts remains the norm. S&P Global likewise reported staffing levels were broadly unchanged, with some firms opting not to replace departing workers. The Bureau of Labor Statistics will release the March jobs report on Friday.
