U.S. manufacturing hits four-year high as cost pressures stay elevated

U.S. factory activity strengthened in July even as input prices stayed elevated, leaving manufacturers with firmer demand but little relief on costs. That split reading has put the industrial recovery and the inflation outlook on the same collision course.

The Institute for Supply Management’s July Manufacturing PMI came in at 48%, which still signals contraction and marked a fifth consecutive month of shrinking activity. The report followed a brief two-month expansion after 26 straight months of contraction, showing how uneven the sector has been even as pockets of strength emerged. Apparel makers and textile mill producers both reported growth, a reminder that the factory slump has not been uniform across industries.

A separate regional gauge pointed in the same direction of improvement. In the Philadelphia Federal Reserve’s July Manufacturing Business Outlook Survey, responses collected from July 7 to July 14 showed general activity back in positive territory, while new orders and shipments rose to their highest readings since February. The employment index also turned positive. Even so, the survey’s two price indexes climbed after earlier declines, underscoring how stubborn cost pressure remains for producers.

That matters because producer prices were 3.3% higher in July 2025 than a year earlier, according to the U.S. Bureau of Labor Statistics. For factories, that means higher costs for raw materials and components can still squeeze margins, delay hiring, and force firms to decide whether to absorb expenses or pass them on to customers. Tariffs have added another layer of pressure for some manufacturers, reinforcing concerns that the rebound could feed inflation as much as output.

For the Federal Reserve, the mix creates a harder policy call. Stronger factory readings would normally support the case for confidence in the economy, but sticky input costs make it harder to argue that price pressure in goods has eased enough for quicker rate cuts. If manufacturing keeps improving while prices remain elevated, policymakers will face a narrower path between supporting growth and preventing inflation from reaccelerating.