US manufacturing mired in weakness; AI spending boom helps some factories

U.S. manufacturing contracted for a sixth consecutive month in August, with the ISM PMI at 48.7, reflecting persistent weakness from import tariffs and uncertain demand. However, an AI spending boom is providing a partial offset, marked by the fastest intellectual property product investment growth in four years. While new orders rebounded, production declined and employment remained subdued, and elevated input prices suggest potential goods price acceleration in late 2025 as tariff costs are eventually passed to consumers.

Analysis

The U.S. manufacturing sector remained in contraction for a sixth consecutive month in August, with the ISM PMI registering 48.7, slightly below the consensus forecast of 49.0. This persistent weakness, which primarily stems from the impact of import tariffs, masks a significant internal divergence. A notable counter-trend is the boom in artificial intelligence-related investment, which drove spending on intellectual property products to its fastest pace in four years during the second quarter. While this provides a crucial support pillar for specific factory segments, the broader picture remains mixed. The forward-looking new orders sub-index encouragingly returned to expansionary territory at 51.4, but this was contradicted by a decline in the production gauge to 47.8 and subdued factory employment amid uncertain demand. Furthermore, inflationary pressures are building, with the Prices Paid index remaining elevated at 63.7. This, combined with slower supplier delivery times, supports the expectation of accelerating goods price inflation in the second half of 2025 as companies begin to pass on tariff-related costs.

Key Decisions for Investors

• Investors should look beyond the headline manufacturing weakness to identify specific opportunities in companies supplying the AI capital expenditure cycle, such as those in high-tech equipment and intellectual property.
• Given the divergence between rising new orders (51.4) and falling production (47.8), it is prudent to remain cautious on broad-based cyclical industrial exposure until a recovery in output materializes.
• The persistently high Prices Paid index (63.7) signals significant future margin pressure for manufacturers and rising consumer inflation, suggesting investors should assess portfolio hedges against inflation and favor companies with strong pricing power.