US Manufacturing Contracts for Fourth Straight Month in June, but ISM PMI Shows Slower Decline Amid Tariff Pressures and Production Rebound

The US manufacturing sector continued to contract in June 2025, according to the latest data from the Institute for Supply Management (ISM), with the Manufacturing Purchasing Managers’ Index (PMI) ticking up modestly to 49.0 from 48.5 in May. While still below the neutral 50.0 threshold that separates expansion from contraction, the reading came in above market expectations of 48.8, signaling that the pace of manufacturing decline has slowed. This marks the fourth consecutive month of contraction, but with signs of stabilization emerging in production and inventory dynamics.

The headline improvement was driven by a notable rebound in the production sub-index, which rose to 50.3 from 45.4, returning to expansion territory for the first time since February. This suggests that some factories resumed output after months of sluggish activity, likely responding to backloaded orders and fiscal support measures aimed at revitalizing domestic supply chains. Similarly, the inventories index rose to 49.2 from 46.7, indicating improved inventory planning and restocking by manufacturers. These two components provide a moderating influence on the broader PMI and point to improving short-term operational footing, particularly for capital goods and durable manufacturing.

However, other key components remained firmly in contraction. New orders fell to 46.4 from 47.6, reflecting persistent weakness in demand—especially from trade-sensitive sectors. The continued slide in new business signals that tariff-related uncertainty and global demand fragility are dampening firms’ willingness to commit to large-scale purchases. This was mirrored by a deeper contraction in order backlogs, which declined to 44.3 from 47.1, and a drop in the employment sub-index to 45.0 from 46.8, underscoring a hesitancy to expand headcount amid demand volatility.

The June report also highlighted rising price pressures, particularly those linked to trade policy. The Prices Index rose slightly to 69.7 from 69.4, extending a run of high readings and suggesting that tariff-induced cost inflation is persisting. With President Trump’s new round of tariffs—including 20% to 40% duties on goods from Vietnam, Japan, and South Korea—set to take effect August 1, purchasing managers reported increased input cost burdens across multiple categories, including metals, electronics, and machinery components. These pricing dynamics may continue to strain margins in downstream industries unless firms are able to pass on costs to consumers or substitute inputs.

The Supplier Deliveries Index fell to 54.2 from 56.1, indicating slower deliveries but with improved relative performance. This metric suggests that the logistical bottlenecks that plagued US ports and rail networks earlier in the year are beginning to resolve, with clearance rates improving despite ongoing tariff documentation checks and customs enforcement actions. The stabilization in delivery times may help reduce production lags and allow firms to better align output with demand expectations in the second half of the year.

From a macroeconomic perspective, the June PMI data adds nuance to the US industrial outlook. The manufacturing sector remains in contraction, but key forward-looking indicators like production and inventories are showing signs of recovery, suggesting that the worst of the industrial slowdown may be behind. However, the drag from weak new orders, shrinking backlogs, and falling employment could limit the recovery’s strength unless domestic demand rebounds or export conditions improve.

Regional divergence remains a key subtext in the ISM data. States in the Midwest and South—particularly those with large automotive, aerospace, and semiconductor clusters—continue to report stronger activity, supported by federal subsidies under the CHIPS and IRA legislation. By contrast, the West Coast and Northeast are seeing weaker readings tied to declining exports and tighter financing conditions.

For the Federal Reserve, the data will likely reinforce the case for patience. While the manufacturing sector is not in recessionary freefall, the combination of contracting orders, sticky input inflation, and subdued employment suggests that aggressive rate cuts are not yet warranted. At the same time, signs of stabilization in production reduce the risk of a broader industrial pullback feeding into negative GDP prints for Q3.

In conclusion, the ISM Manufacturing PMI’s modest rise to 49.0 in June 2025 reflects a slower pace of contraction, driven by a rebound in production and improved inventory management. However, continued weakness in demand, employment, and order backlogs—coupled with persistent tariff-related inflation—suggest that manufacturing conditions remain fragile. The sector’s near-term trajectory will depend heavily on the evolution of trade policy, fiscal support, and global demand, with mixed signals likely to persist through the summer.

Sources

Institute for Supply Management. (2025). ISM Manufacturing Report on Business – June 2025. [https://www.ismworld.org]

US Census Bureau. (2025). Factory Orders and Durable Goods Preview – May Data.

Bureau of Labor Statistics. (2025). Manufacturing Employment Trends – June Snapshot.

Bloomberg. (2025). Tariff Pressures and PMI Reaction – US Trade Policy Update.

Goldman Sachs Research. (2025). US Industrial Sector Outlook – H2 2025 Forecasts.