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Manufacturing Sector Faces Continued Contraction Amid Economic Uncertainty

6/2/2025
The U.S. manufacturing sector contracted for the third straight month in May, raising concerns among industry leaders. New orders, production, and employment continue to decline, while prices for raw materials are on the rise, creating a challenging environment for manufacturers.
Manufacturing Sector Faces Continued Contraction Amid Economic Uncertainty
U.S. manufacturing contracts for the third month in a row as new orders and production decrease. Prices increase as economic uncertainty looms.

Manufacturing Sector Contracts for Third Consecutive Month

Economic activity in the manufacturing sector experienced contraction in May 2025, marking the third consecutive month of decline. This trend follows a brief two-month expansion period after 26 months of continuous contraction, according to the latest Manufacturing ISM® Report On Business® released by the Institute for Supply Management® (ISM®). The report, presented by Susan Spence, MBA, Chair of the ISM Manufacturing Business Survey Committee, reveals that the Manufacturing PMI® registered at 48.5 percent in May, a slight decrease from the 48.7 percent noted in April.

Key Indicators of Manufacturing Activity

The report indicates ongoing challenges in the manufacturing landscape. The New Orders Index contracted for the fourth month in a row, registering at 47.6 percent—an increase from the 47.2 percent recorded in April. However, this figure reflects a continued decline in demand. The Production Index also remained in contraction territory at 45.4 percent, although it did improve slightly from April's 44 percent.

Notably, the Prices Index indicated continued price increases, registering 69.4 percent, down marginally from April's 69.8 percent. The Backlog of Orders Index showed some positive movement, registering at 47.1 percent—an increase of 3.4 percentage points from April. Conversely, the Employment Index remained in contraction, at 46.8 percent, only slightly improving from the previous month's 46.5 percent.

Supplier Deliveries and Inventories

The Supplier Deliveries Index indicated a continued slowing of deliveries, registering at 56.1 percent, which is 0.9 percentage points higher than April. This slowdown is typical as the economy progresses and customer demand increases. However, the Inventories Index fell to 46.7 percent, a significant drop of 4.1 percentage points from April, indicating that inventories have also begun to contract.

Exports and Imports Reflect Economic Challenges

The New Export Orders Index registered a concerning 40.1 percent, a sharp decline from April's 43.1 percent. The Imports Index also plunged into significant contraction at 39.9 percent, down 7.2 percentage points compared to April, indicating a decrease in demand for imported goods.

Insights from Industry Respondents

Industry respondents noted a softening demand in the commercial vehicle market, attributing this to higher prices and ongoing economic uncertainty. Additionally, various sectors reported challenges such as tariff-related issues impacting supplier relationships and profitability. For instance, vehicle manufacturers have increased prices to safeguard their margins, creating financial distress among suppliers.

In the Food, Beverage & Tobacco Products sector, respondents cited government spending cuts and tariffs as significant hurdles, discouraging inventory risk-taking. Meanwhile, in the Computer & Electronic Products sector, suppliers are passing on tariff costs directly to customers, reflecting a broader trend of price pass-throughs across industries.

Price Increases and Commodity Availability

The Prices Index indicates that raw materials prices have risen for the eighth consecutive month, driven largely by increases in steel and aluminum prices, as well as the effects of tariffs on imports. Currently, 45 percent of companies report higher prices, reflecting a gradual increase over the past several months.

Commodities such as aluminum, steel, and electrical components are noted to be in short supply, further complicating the supply chain dynamics within the manufacturing sector.

Conclusion: A Complex Manufacturing Landscape

The Manufacturing ISM® Report On Business® for May 2025 highlights a complex economic environment where the manufacturing sector continues to face various challenges. With ongoing contractions in key indexes and rising prices, the outlook remains uncertain. As manufacturers navigate these difficulties, understanding the trends and indicators presented in this report will be crucial for strategic planning and operational adjustments moving forward.

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