American factories are posting their strongest performance in more than four years, yet the rebound comes with a troubling caveat: relentless price increases and supply chain volatility that industry executives say eclipses even the chaos of the pandemic.
The Institute for Supply Management reported a July reading of 55.6 for its manufacturing index, surpassing Wall Street’s expectations of 54.0 and marking the best showing since May 2022. Any reading above 50 signals expansion, and the index measures the share of companies reporting growth across the sector.
Strong gains in new export orders and production drove the headline number, with production jumping 6.3 points. Manufacturing employment also hit its highest level since August 2022, expanding for the first time in 33 months, according to ISM officials.
Pricing Pressures Persist
Beneath the positive top-line figures, however, inflation concerns remain acute. The ISM’s prices index registered 71.1, meaning nearly three-quarters of respondents reported rising prices. This marks the 22nd consecutive month that prices have headed higher.
Industry commentary painted a picture of mounting frustration. A primary metals executive told ISM surveyors there is “no normalcy in sight in the world of metals,” adding that the current environment “makes me yearn for the coronavirus pandemic chaos, which was more manageable than whatever this is that we are in.”
An executive in the electrical equipment sector echoed those sentiments, stating that “the pricing volatility and lead-time extensions in this market are arguably worse than the pandemic era.” Unlike the pandemic period, when constraints eventually leveled out, this manager described “nothing but consistent upward trends for both pricing and lead times that show no signs of slowing down.”
Fed Faces September Decision
The conflicting signals—robust growth paired with stubborn inflation—present Federal Reserve Chairman Kevin Warsh and his colleagues with a challenging policy calculus ahead of their September meeting. The combination could push the central bank toward an interest rate increase as soon as September 16.
“If trade is less of a drag this quarter and businesses restock inventories, economic growth could reach 2.2% in the third quarter,” wrote Jeffrey Roach, chief economist at LPL Financial. “As a result of demand-induced inflation and energy supply shortages, the Warsh-led Fed will be pressured to raise rates on September 16.”
The Federal Open Market Committee held its benchmark overnight rate in a range between 3.5% and 3.75% at its most recent meeting last week, where it has remained all year. This stance marks a reversal from last year, when concerns about weak hiring prompted three consecutive rate cuts starting in September.
Troy Ludtka, senior U.S. economist at SMBC Nikko Securities Americas, noted that the production index reached its highest level since November 2021. “Strong payroll growth from two of the most interest rate sensitive sectors [manufacturing and construction] will enable the Fed to continue its hawkish communication drift,” he wrote.
Market Reaction and Economic Outlook
Following the manufacturing report, Goldman Sachs raised its third-quarter economic growth forecast to 2.4%, up from an initial second-quarter estimate of 1.5%.
Financial markets, however, remained somewhat skeptical about the timing of a rate increase. According to the CME Group’s FedWatch tool, odds for a hike at the September 15-16 FOMC meeting stood at 64.5% by midday Monday, down slightly from Friday. That hesitation likely reflects ambiguity in recent comments from Warsh that left traders uncertain about the central bank’s intentions.
Richard de Chazal, macro analyst at William Blair, suggested the inflation picture would be difficult for policymakers to ignore. “Companies continue to complain about the pricing environment, and this report shows that this is not changing much,” he wrote. “From the Fed’s perspective today’s [ISM] report should help tilt the scales further toward tightening policy at the September FOMC meeting.”
June inflation data offered some relief, as a temporary pause in Middle East tensions drove down energy prices and shelter costs continued to moderate. Yet virtually all pricing measures remain well above the Fed’s 2% target, keeping pressure on officials to act.
Source: www.cnbc.com — https://www.cnbc.com/2026/08/03/manufacturing-survey-shows-inflation-worries-adding-to-pressure-on-fed.html
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