US manufacturing hits 43-month high in March amid rising supply concerns

Factory activity in the United States, the world’s largest economy, expanded in March, with the manufacturing PMI rising to 52.7—its highest level in nearly 43 months—driven by robust domestic consumption as well as improving overseas demand. Strong new orders and production growth underpinned the expansion, reflecting resilience in the industrial sector despite lingering cost pressures and global uncertainties.

However, escalating tensions stemming from the Iran war have heightened concerns over supply disruptions, particularly due to risks to key maritime trade routes in the Middle East. The potential closure or disruption of crucial transit corridors, including those used by merchant ships and oil tankers, has intensified fears of delayed deliveries and rising input costs. These geopolitical risks continue to pose significant challenges to global supply chains and could weigh on manufacturing momentum going forward.

Best since August 2022
The US ISM Manufacturing Index rose to 52.7 in March from 52.4 in February. This is the strongest reading since August 2022, while the consensus view had expected it to come in at 52.3. Production increased to 55.1 from 53.5, reflecting the legacy of strong new orders in recent months and a rising order backlog. New orders for March dipped to 53.5 from 55.8, while the order backlog came in at 54.4 versus 56.6 previously; however, both remain above their six-month averages of 51.6 and 50.1, respectively. This suggests that production can continue to grow strongly for at least the next couple of months.

The less positive details include a softer employment component at 48.7 versus 48.8 previously. This remains below the 50 breakeven level, indicating that jobs continue to be shed in the sector. Unsurprisingly, there was a sharp jump in the prices paid component to 78.3 from 70.5, reflecting the spike in oil prices, while reduced tariff rates following the striking down of IEEPA are offering only a modest mitigating offset at this stage. As such, profit margins remain under pressure.

James Knightley, Chief International Economist, US, at ING Economics, stated, “The US ISM manufacturing index improved further in March, led by strong production levels. A solid order book suggests production will continue growing in the coming months, but rising prices and weaker employment underscore the lingering challenges for the sector. Recent US activity data has, in general, surprised to the upside so far this year, and that has continued with today’s retail sales and ISM manufacturing figures, suggesting that the economy is in a relatively strong position to withstand the economic challenges presented by the Middle East conflict.”

Service sector headwinds
The ISM report suggests that the US manufacturing sector started the year in a very healthy position, especially relative to international peers. Moreover, the relationship between gross domestic product (GDP) growth and the ISM output series for the manufacturing and services sectors indicates a likely revision to 2026 GDP growth forecasts, amid rising uncertainty and a spike in energy costs driven by the conflict in the Middle East. That said, while the manufacturing sector is performing well, heightened energy costs and economic uncertainty are likely to weigh more heavily on the services sector, with the headline ISM index expected to decline to 53.0 from 56.1.

The US services sector, as measured by the ISM Services PMI, is likely to face stronger headwinds compared to manufacturing due to its higher sensitivity to domestic economic conditions. Elevated inflation, still-tight financial conditions, and slower income growth are beginning to weigh on consumer spending, particularly in discretionary segments such as travel, hospitality, and retail services. Since services activity is heavily demand-driven and less export-oriented than manufacturing, any cooling in household consumption or business spending tends to have a more immediate and pronounced impact.

Additionally, rising geopolitical tensions—especially the ongoing conflict involving Iran—are pushing up energy prices and transportation costs, which disproportionately affect service providers through higher operating expenses. At the same time, labour remains a key cost component in services, and persistent wage pressures continue to squeeze margins. Supply chain disruptions and uncertainty in global trade routes also indirectly affect logistics, shipping, and financial services, adding another layer of strain that could dampen overall momentum in the sector.

DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com