–ISM’s Spence: New Orders Up on Pent-Up Demand, Instead of Customers Stocking Up Before Iran War Causes Further Disruption
–Spence: Employment in Contraction but Better in May, Elevated Prices Ease, Both in Right Direction
By Max Sato
(MaceNews) – U.S. manufacturing activity expanded for the fifth straight month in May backed by a solid gain in new orders, weathering the impact of tariff-distorted global trade, but supply mangers are now feeling the direct impact of the Mideast conflict boosting the prices for a wide range of goods and causing shortages.
The purchasing managers index compiled by the Institute for Supply Management rose 1.3 percentage point to a four-year high of 54.0 after being flat at 52.7 in April, ISM data released Monday showed. The increase was led by higher new orders and production thanks to what is believed to be pent-up demand, instead of customers stocking up before further price hikes amid the lingering Iran war.
“In May, 25% of the comments were positive and 69% negative, with a 1-to-2.7 ratio of positive to negative sentiment,” the ISM said in a statement. “Among comments, the Iran war was mentioned in 42% and tariffs in 18%; 57% of the panelists mentioned pricing volatility as an issue for their companies.”
“Impact of Iran conflict starting to directly and negatively impact cost of supply chain,” a transportation equipment maker told the ISM. “Oil and related commodities are escalating in price.”
A machinery producer said: “The Middle East conflict is triggering shipment delays and uncertainties. Elevated gas prices and inflation will surely impact our purchases. However, over the last quarter, we’ve seen increased demand that was unexpected.”
“Prices continue to rise for many products – some due to increase in data center creation for electronic components, others as a result of the Iran war and reductions in availability of oil/petroleum,” a firm from the computer and electronic products industry said.
ISM Manufacturing Business Survey Committee Chair Susan Spence called the May report “positive,” telling reporters that she thinks a steady increase in the new orders subindex to 56.8 in May from 54.1 in April after slipping to 53.5 in March is based on “pent-up demand.” Only two months ago, she cautioned that the index, although in expansion for three months at the time, was “creeping back down to (the neutral level of) 50” after soaring to a nearly four-year high of 57.1 in January.
The May report also points to two main challenges that have kept the manufacturing PMI from recovering fast from its 2025 doldrums caused by the protectionist U.S. trade policy.
The employment subindex has been in contraction since January 2023 except for one month and stubbornly below the neutral line of 50, failing to pop above 49 during most of the 41-month period. At the same time, as the index recovered most of the previous month’s loss in May, the panelist comment ratio of hiring to managing/reducing head counts stood at 1 to 1 in May, better than in April, when for every comment on hiring, there was 1.7 on reducing head counts.
After surging in the previous two months, the prices subindex slipped to 82.1 in May from a four-year high 84.6 in April, but it has been at an alarmingly high level above 80 in the past two months. It is the worst situation since Russia’s invasion of Ukraine triggered a spike to 87.1 in March 2022 and the index stayed above 80 in the following two months. Higher steel and aluminum prices are affecting the entire value chain, tariffs are applied to many imported goods and the Mideast conflict has boosted petroleum-based products, according the ISM.
Spence looked at the bright side of the latest development in the two subindexes. “Both of them are in right direction,” she said. “The best combination that I’ve seen in a while.” But she added that even though the prices index fell 2.5 points in May, “people are still worried about it.”
Asked whether the U.S. economy may also be affected by high costs of energy and shortages of naphtha and other key materials that are hurting production in Asia (one of the top snack makers in Japan is being forced to print potato chip packages only in black and white), Spence said higher prices sometimes lead to supply shortages and if that happens, it could impact production, although that U.S. firms are “a little bit protected from shortages.”
The five sub-indexes that make up for the PMI (February figures in parentheses):
New orders 56.8 (54.1) +2.7; in expansion for the fifth straight month. It rose a combined 3.3 points in April and May to recover some of its loss incurred in the previous two months totaling 4.6 points. The index recorded a 9.7-point jump in January to 57.1, the highest since 59.7 in February 2022.
Production 54.3 (53.4) +0.9; in expansion for the seventh month in a row. The index has fluctuated month to month after rising 5.2 points in January to 55.9, the highest since 58.1 in February 2022.
Employment 48.6 (46.4) +2.2; below the neutral level of 50 since October 2023; It is the highest since February, when it rose 0.7 point to 48.8, the highest since 49.7 in January 2025.
Supplier deliveries 60.6 (60.0) 0.0; remains the highest since 65.7 in May 2022 (above 50 means slower deliveries).
Inventories 49.9 (49.0) +0.9; the highest since 50.3 in April 2025.
Among other sub-indexes:
Customers’ inventories 42.7 (39.1) +3.6; the highest since 43.3 in December 2025. The index dipped 4.6 points to 38.7 in January, hitting the lowest since 35.2 in June 2022.
Prices 82.1 (84.6) -2.5; The index remains elevated after rising 6.3 points in April to reach the highest since 87.1 in May 2022.
Background:
Back in June 2022, the prices index eased further to 78.5 from 82.2 in May, 84.6 in April and a peak of 87.1 in March 2022, when it jumped 11.5 points, following Russia’s invasion of Ukraine on Feb. 24 that sparked concerns about energy and commodities supply from the region. The ISM report for June 2022 showed that U.S. manufacturing activity growth slowed that month to the lowest rate in two years with softer new orders and record high lead times needed to deliver goods as companies continued to face labor shortages, supply delays, and high prices.