US manufacturing activity at four-year high, supply constraints growing

US manufacturing activity increased more than expected in May, hitting the highest level in four years, likely driven by businesses front-loading orders amid rising prices and shortages because of the war with Iran, Report informs via Reuters.

The Institute for Supply Management survey ​on Monday showed the three-month-old US-Israeli war with Iran, which has virtually closed the Strait of Hormuz, was fracturing supply chains and threatening to undermine the manufacturing recovery.

Businesses ranging from ‌transportation equipment to fabricated metal products complained about "escalating" prices and "customers unwilling to commit to expenditures beyond a very short term." A fragile ceasefire was under threat on Monday as the United States and Iran traded attacks, boosting oil prices by more than 3%.

"The durability of this manufacturing upturn remains in doubt," said Oliver Allen, senior US economist at Pantheon Macroeconomics. "Many companies are bringing forward orders and activity to build inventories to protect against supply chain disruptions. That lift likely will be short-lived, and the medium-term ​outlook for demand still looks shaky."

The ISM said its manufacturing PMI advanced to 54.0 last month, the highest reading since May 2022, from 52.7 in April. A reading above 50 indicates expansion in ​manufacturing, which accounts for 9.4% of the economy. Economists polled by Reuters had forecast the PMI rising to 53.

Manufacturing has now grown for five straight months after ⁠being dragged down by President Donald Trump's sweeping import tariffs. It is being anchored mostly by an artificial intelligence spending spree. The conflict has severely disrupted the shipping of commodities and raised prices of goods like ​energy, aluminum and fertilizers.

Sixteen industries reported growth last month, including textile mills, paper products, electrical equipment, appliances and components as well as primary metals, miscellaneous manufacturing, machinery and transportation equipment. Wood products was the only industry reporting a ​contraction.

The war was mentioned in 42% of the comments from manufacturers. Tariffs remained a concern, mentioned in 18%. About 57% of the respondents mentioned pricing volatility as an issue for their companies, ISM Manufacturing Business Survey Committee Chair Susan Spence said, adding that "25% of the comments were positive and 69% negative."

Some manufacturers of transportation equipment said the "Iran conflict (was) starting to directly and negatively impact cost of supply chain." Makers of machinery said that "the Middle East conflict is triggering shipment delays and uncertainties," but others ​in the industry also reported unexpected "increased demand" over the last quarter.

Food, beverage and tobacco products manufacturers said the "cost of diesel is having huge impacts on our profitability," and also noted confusion "around tariff refunds." The US Supreme Court ​in February struck down the broad tariffs. The White House responded with new duties. Trump has defended the tariffs as necessary to revive the domestic industrial base.