U.S. manufacturing activity expanded in July as AI demand surged. The acceleration resulted from a massive wave of capital spending on AI infrastructure and a sudden hiring turnaround, helping to buffer the broader economy against persistent global unrest and inflationary pressures.
The Institute for Supply Management reported Monday (Aug. 3) that its Manufacturing Purchasing Managers’ Index, or PMI, climbed to 55.6% in July, a substantial 2.3 percentage point increase from June’s reading of 53.3%. The reading represents the highest level of industrial expansion since May 2022, when the index registered 55.9%.
This robust industrial performance indicates that the overall economy grew for a 21st consecutive month. Historically, a PMI reading of 55.6% corresponds to a 2.8% annualized increase in real gross domestic product, a marked upgrade from the 2% annualized real GDP growth signaled by June’s reading.
The manufacturing strength comes as economists estimate that the AI investment boom has become a primary driver of domestic growth. “Without this investment boom, I think it’s pretty clear the economy would be running cooler,” said Michael Pearce, an economist at Oxford Economics. Pearce said he estimates AI capital spending alone has accounted for nearly a quarter of recent GDP growth, while a broader mix of AI-related hiring, data center construction, and stock market gains has accounted for roughly one-third of the nation’s economic expansion.
AI infrastructure demands unleash production surge
A dramatic pickup in output anchored July’s acceleration. The ISM Production Index surged 6.3 percentage points to 58.5% in July, up from 52.2% in June. That marks the highest production index level in nearly five years, since November 2021, when it reached 60.5%.
Demand also remained highly robust, with the New Orders Index expanding for the seventh consecutive month to 56.7%, up 0.7 percentage point from June’s 56%. “Demand sentiment was optimistic in July, with a 3.5-to-1 ratio of positive to negative comments,” said Susan Spence, chair of the ISM Manufacturing Business Survey Committee. Order backlogs likewise swelled, with the Backlog of Orders Index rising 4.5 percentage points to 55%.
The surge in demand is split between the high-tech and defense sector and the consumer-facing economy. Much of the momentum concentrates in the semiconductor and data center supply chains.
“Now that it seems the buildout of AI infrastructure globally is nearing real activation, products going into data centers are at full procurement and manufacturing ramp-up,” said an executive in the machinery sector. “Thus, demand for our semiconductor end products and connectivity (power, networking, and photonics) is booming.” Another panelist in the computer and electronic products sector added, “We continue to operate in a favorable demand environment driven by growth in the semiconductor, AI, advanced packaging, and high-performance computing markets.”
This AI-driven capital surge is visible in macroeconomic data. The Commerce Department reported that business investment in AI-related categories—including software, data centers, and computer equipment—reached an annual pace of $1.5 trillion in June. Data center construction outlays alone surged to an annual rate of $68.3 billion in June, an increase of $21.5 billion from a year earlier, while all other private construction fell by $101.6 billion over the same period.
Factories resume hiring to meet order backlogs
With production schedules intensifying, manufacturers reversed a multi-year trend of labor contractions. The ISM Employment Index jumped 3.1 percentage points in July to 52.8%, climbing out of contraction territory for the first time in 33 months. The index had not registered expansion since August 2022, when it stood at 54.2%.
“The Employment Index registered in expansion territory for the first time in 33 months,” Spence noted, pointing to a shift in hiring behavior. According to the July report, 60% of survey panelists reported their companies are hiring, while 40% indicated that managing headcounts remained the norm. This represents a major turnaround from the start of the year, when 66% of companies were actively managing or reducing headcount to control costs.
The hiring turnaround is driven by major industries attempting to clear backlogs, though labor and material shortages continue to hinder supply chains. In the transportation equipment sector, an executive noted that “aerospace and defense demand continues to be strong and growing, based on business backlogs.” However, “competing for scarce supply—electronics, certain critical minerals, and other categories—is challenging on-time fulfillment.”
Geopolitical pressures and tariffs sustain high prices
Despite the production boom, corporate supply chains remain heavily constrained by global conflicts, port congestion, and trade policy. The Prices Index registered 71.1% in July. Although this represents a 1.9 percentage-point decrease from June’s 73% and the third consecutive monthly decline, it still indicates that raw material prices have increased for the 22nd straight month.
“The Prices Index reading is still being driven by increases in steel and aluminum prices that impact the entire value chain, tariffs applied to many imported goods, and increases in petroleum-based products as a result of the Middle East conflict,” Spence said.
Geopolitical risks in the Middle East and the resumption of skirmishes involving Iran have immediately hit shipping costs and energy markets. Among negative comments from panelists, pricing volatility was the leading concern at 57%, followed by the war in Iran at 43%, increasing lead times at 22%, and tariffs at 18%. In comparison, the June report cited the Middle East conflict in 31% of negative comments and tariffs in 17%.
The logistical friction translated into further delays, with the Supplier Deliveries Index rising 1.5 percentage points to 58.9%, marking the eighth consecutive month of slower deliveries. An executive in the electrical equipment and appliances sector described the current volatility as “arguably worse than the pandemic era,” citing “consistent upward trends for both pricing and lead times that show no signs of slowing down,” including price increases of 5% to 25% for PCB assemblies.
Divergent trends across sectors
Despite these steep operational hurdles, the industrial expansion was remarkably broad-based. Fifteen of the 18 manufacturing industries tracked by the ISM reported growth in July, led by Printing & Related Support Activities, Apparel, and Allied Products. Four of the nation’s six largest manufacturing sectors expanded: Transportation Equipment, Machinery, Computer & Electronic Products, and Food, Beverage & Tobacco Products.
Chemical products was the only industry to report a contraction, reflecting its heavy exposure to rising raw petroleum costs and a slowdown in consumer demand.
While overall corporate sentiment remained net-negative, it improved from June. In July, 38% of panelists’ comments were positive, and 62% were negative, representing a positive-to-negative ratio of 1:1.6, compared with a more pessimistic ratio of 1:1.9 in June. With customers’ inventories remaining in “too low” territory at 40.7%—contracting at a faster rate than June’s 42.3%—manufacturers are expecting a sustained pipeline of orders to support output through the second half of the year. “A ‘too low’ status for the Customers’ Inventories Index is usually considered positive for future production,” Spence said.
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