Workers check glass pieces at a glassworks in the Brooklyn borough of New York.

U.S. manufacturing activity expanded in May at the fastest pace in four years, bolstered by a pickup in new orders and production. The Institute for Supply Management's (ISM's) manufacturing gauge rose 1.3 points, to 54, according to data released Monday. Readings above 50 indicate growth.

The measure has now signaled expansion for five straight months, pointing to renewed vigor in the manufacturing sector amid a surge in artificial intelligence (AI) investment, more favorable tax provisions, and diminished trade policy uncertainty.

Nearly every manufacturing industry reported growth in the month, including printing, textiles, electrical equipment, and plastics. The only industry reporting contraction was wood productions. New-orders growth accelerated to a four-month high, as factory production also gained steam.

Part of that strength may reflect customers trying to stockpile merchandise in an effort to front-run future price hikes. Conflict in the Middle East and the effective closure of the Strait of Hormuz have driven up the cost of oil and other materials. While oil prices have subsided from their peaks, they remain well above pre-war levels. The ISM data indicated materials' costs continued to rise sharply for producers, with the group's price gauge easing some but remaining close to levels not seen since 2022.

Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said she thinks more of the improvement in new orders and production is due to pent-up demand than companies seeking to boost inventories—even with concerns about high prices due to the Middle East conflict. "The worry, of course, is that if prices don't settle down with the quicker end to the war than maybe has happened that could start to choke off demand," Spence said on a call with reporters.

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Select industry comments:

  • "Impact of Iran conflict starting to directly and negatively impact cost of supply chain. Oil and related commodities are escalating in price." — Transportation Equipment
  • "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." — Machinery
  • "Cost of diesel is having huge impacts on our profitability. Confusion abounds around tariff refunds. We purchase many imported goods but in most cases are not the importer of record, so it is currently unclear to what we may be entitled." — Food, Beverage & Tobacco Products
  • "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." — Computer & Electronic Products
  • "Continuing trends of 15% sales increase in April, cost increases on a majority of raw materials, and fuel charges on many inbound and outbound deliveries. We remain cautiously optimistic that if global economic factors stabilize and the Iran conflict ends, we can continue with increased sales and maintain acceptable margins." — Chemical Products

Sustained cost pressures could mean even higher prices for American consumers. Data out last week showed the Federal Reserve's preferred gauge of inflation rose 3.8 percent in April from a year earlier—nearly double the central bank's goal and the fastest pace since 2023.

A measure of supplier deliveries held at the highest level since 2022, as war-related disruptions lengthen supply chains. Imports and exports expanded in May, and the ISM's gauge of inventories rose to a one-year high. The ISM's employment gauge improved in May, though it continued to indicate shrinking headcount. The government's monthly employment report will be published Friday.

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What Bloomberg economists say...

"Some survey respondents reported customers pushing back against higher prices, but orders show that demand for manufactured goods is outpacing supply. With inventories persistently declining, we think the production outlook is solid for the months ahead."

— Stuart Paul

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