U.S. factory growth cools in August as tariffs and war-linked costs squeeze manufacturers

U.S. factory activity expanded for an eighth consecutive month in August but grew at a noticeably slower pace, according to survey data released Tuesday by the Institute for Supply Management, as manufacturers reported cooling orders, softer hiring and input costs that remained stuck near multi-year highs.

The ISM Manufacturing PMI registered 54.6% in August, down 1 percentage point from July's 55.6%, the trade group said in its monthly Report on Business. Any reading above 50% signals expansion. The pullback followed a sharp jump in July and left the index roughly midway between June's 53.3% and last month's high, underscoring an economy that is still growing but doing so unevenly from month to month.

The numbers

Beneath the headline figure, the details pointed to a factory sector losing some momentum. The New Orders Index fell 3 percentage points to 53.7%, and the Backlog of Orders Index dropped a similar amount to 51.8%. Employment slipped to 51.2% from 52.8%, only its second month of growth after a stretch of contraction earlier this year. Production held up better, easing just 0.2 point to 58.3%, and export orders ticked higher to 53.2%.

Prices paid by manufacturers for raw materials and components were flat at 71.1%, matching July and marking a 23rd consecutive month in which the index has signaled rising costs — one of the most persistent inflationary readings in the survey's history. Susan Spence, chair of ISM's Manufacturing Business Survey Committee, wrote in the report that steel, aluminum and petroleum-linked prices continued to move through the supply chain, compounding the effects of tariffs already in place.

Of the 18 manufacturing industries ISM tracks, 15 reported growth in August, led by primary metals, electrical equipment and transportation equipment, while wood products and chemical products were the only two to contract. Survey commentary skewed negative for a second straight month: 42% of respondent comments were positive against 58% negative, a ratio Spence described as roughly 1-to-1.4.

"Pricing volatility was mentioned in 57 percent of negative comments, the Iran war 30 percent, increasing lead times 46 percent and tariffs 29 percent," Spence wrote in the August report, summarizing the concerns manufacturers raised most often.

How the sector got here

The August slowdown caps a choppy year for U.S. factories. The sector spent much of the first half of 2026 oscillating around the 50% break-even line before accelerating through the summer, helped by a wave of data-center and AI-infrastructure-linked equipment orders and by companies rebuilding inventories that had been drawn down for what ISM data show has been roughly five straight quarters — the longest such stretch since the 2008-09 recession. That rebuilding has run up against a less favorable cost backdrop. Tariffs on steel, aluminum and a range of imported industrial inputs, layered on top of already-elevated petroleum prices linked to the conflict involving Iran, have kept the ISM's price index near its highest sustained level in more than two decades, a pattern respondents in ISM's July report had already flagged as a growing concern heading into the back half of the year.

Those same pressures are now central to the debate inside the Federal Reserve. Kevin Warsh, who was confirmed by the Senate in May and became the central bank's 17th chair, has taken a harder line on inflation than his predecessor, Jerome Powell. At his confirmation hearing, Warsh told lawmakers that inflation "is a choice, and the Fed must take responsibility for it," while also stressing that "the president never asked me to predetermine…any interest rate decision…nor would I ever agree to do so." The Federal Open Market Committee held its benchmark rate steady at 3.50%-3.75% at its July 28-29 meeting on a 9-3 vote, with three members dissenting in favor of an increase — a split that has left investors uncertain how the committee will act when it meets again on September 15 and 16.

Who is affected

The mixed signal in Tuesday's report matters well beyond factory floors. Manufacturing makes up roughly 9-10% of U.S. output but has an outsized influence on how the Fed reads the broader inflation picture, because factory input costs tend to feed into consumer prices with a lag. A prolonged run of elevated ISM price readings — now in its 23rd month — is precisely the kind of signal that hawkish Fed officials point to when arguing that price pressures have not been fully wrung out of the economy.

Companies most exposed include metals-intensive manufacturers already absorbing tariff costs, exporters navigating a stronger New Export Orders reading against an uncertain trade backdrop, and smaller suppliers with less pricing power to pass costs on to customers. Workers in the sector are also affected: the Employment Index's return to modest growth is a positive sign after months of contraction, but its deceleration in August suggests hiring plans remain tentative. Households more broadly stand to feel the effects if elevated input costs continue working their way into retail prices, or if the Fed responds with tighter monetary policy that raises borrowing costs on mortgages, auto loans and business credit.

Reaction

Economists and strategists framed the report as reinforcing, rather than resolving, the argument for a rate move this month. Futures markets were pricing roughly a two-in-three probability of a quarter-point increase at the September meeting even before Tuesday's data, according to strategists at J.P. Morgan. "The combination of a slower-than-expected normalization of supply chains around the Strait of Hormuz and market questioning of inflation-fighting credibility after the July FOMC meeting has lowered the bar for a rate hike in September," Phil Camporeale, J.P. Morgan's chief investment strategist, said in commentary on the rate outlook.

Coverage of Tuesday's release from wire services, circulated by market-data outlets, noted the 54.6% reading came in below the 55.2% median forecast among economists, adding to a string of recent indicators — alongside softer job-openings data — that have complicated the Fed's read on how much slack remains in the economy. ISM itself, whose Report on Business surveys have tracked manufacturing sentiment since the 1930s, characterized the overall economy as still expanding — a 22nd consecutive month above the composite index's break-even threshold — even as individual components lost speed.

What happens next

Attention now turns to the Fed's September 15-16 meeting, the first since Warsh's confirmation to include a fresh round of policymaker economic projections. A rate increase, rather than the cuts markets had anticipated earlier in the year, would mark an unusual reversal and is likely to keep borrowing costs elevated for manufacturers and consumers alike heading into the fourth quarter. ISM is scheduled to release its next Manufacturing PMI report — covering September data — on October 1, which will show whether August's deceleration was a pause or the start of a longer slowdown. In the meantime, manufacturers surveyed by ISM said they expect little near-term relief from tariff- and energy-driven cost pressures, with several respondents in industries such as chemicals and machinery describing plans to shift some production offshore or absorb further margin pressure rather than raise prices further.