US manufacturing contracts for sixth month, misses estimates

US manufacturing activity contracted for the sixth consecutive month in August, with the ISM PMI at 48.7, falling short of economist estimates and signaling continued pressure from import tariffs. Despite overall weakness, marked by declining production and employment, the sector saw a significant rise in new orders (51.4) for the first time this year and robust investment in AI-related products and intellectual property, offering some support. While input prices declined, indicating easing tariff volatility, the persistent contraction and shrinking order backlogs highlight a challenging, albeit nuanced, outlook for the industry.

Analysis

The U.S. manufacturing sector remained in a state of contraction for the sixth consecutive month in August, with the ISM PMI registering 48.7, a slight improvement from July's 48.0 but below the consensus estimate of 49.0. This data underscores persistent weakness, largely attributed to import tariffs, in a sector that constitutes 10.2% of the U.S. economy. However, the report presents a bifurcated picture with significant conflicting signals. A key positive is the forward-looking new orders index, which recorded its first expansion this year, jumping 4.3 points to 51.4. This is counterbalanced by deteriorating current conditions, as the production index fell back into contraction at 47.8 and factory employment weakened further due to uncertain demand and shrinking order backlogs. A notable pocket of strength is the surge in business investment in AI-related intellectual property products, which grew at its fastest pace in four years. On the cost front, the prices paid index declined to 63.7, suggesting a near-term easing of tariff-induced volatility, though economists anticipate goods prices will accelerate again in the second half of 2025.

Key Decisions for Investors

• Given the headline contraction and weak employment, maintain a selective approach to industrial sector investments, as near-term risks persist despite some positive forward-looking indicators.
• Prioritize exposure to companies supplying the artificial intelligence and intellectual property investment cycle, as this segment demonstrates durable growth and provides a significant cushion against broader manufacturing weakness.
• Closely monitor the divergence between the new orders index, which rose to 51.4, and the production index, which fell to 47.8; a convergence in subsequent reports is necessary to confirm a sustainable recovery.
• Factor in the risk of goods price re-acceleration in the second half of 2025, as forecasts suggest the full impact of tariffs on supply chain costs has not yet materialized, potentially pressuring future margins.