US manufacturing holds steady in April but inflation gauge hits 84.6

The US manufacturing sector’s growth held steady in April, but a sharp acceleration in input costs to the highest level in nearly two years signals persistent inflationary pressures that challenge the Federal Reserve's path forward.

"Rising tax refunds were outpacing the increased burden of gasoline spending two to one in March and most of April," wrote Michael Pearce, the chief U.S. economist at Oxford Economics. "With tax refund season winding down and gas prices still climbing, the hit to consumer spending will become more evident from May.”

The Institute for Supply Management’s manufacturing PMI registered 52.7 in April, unchanged from the previous month but missing the median economist forecast of 53.2, according to data released Thursday. While a reading above 50 indicates expansion, the details of the report painted a conflicting picture of an economy grappling with resurgent inflation and weakening labor dynamics. The Prices Paid sub-index surged to 84.6 from 78.3, far exceeding estimates of 80, while the employment gauge fell deeper into contraction at 46.4.

This mixed data places the Federal Reserve in a difficult position. Stubbornly high inflation, reinforced by the Fed's preferred gauge rising 3.5% annually in March, calls for a restrictive monetary policy. However, contracting factory employment and softening new orders suggest the economy could be losing momentum under the weight of higher interest rates and geopolitical shocks, increasing uncertainty for markets.

Inflationary Shock Complicates Fed's Outlook

The most alarming component of the April report was the Prices Paid index, which soared to its highest reading since June 2024. This jump reflects surging input costs for manufacturers, exacerbated by global supply disruptions. The war in Iran, which led to the closure of the Strait of Hormuz, caused gasoline prices to shoot up 21% in March, according to Commerce Department data. This energy shock is now rippling through production costs, as seen in the ISM report. The development supports the Fed’s recent cautious stance and pushes back on market expectations for imminent interest rate cuts.

Cracks Appear in Employment and Orders

While the headline index suggests continued expansion, the report’s underbelly revealed notable weakness. The Employment Index tumbled to 46.4 from 48.7, marking its sixth consecutive month in contraction and the lowest reading this year. This aligns with a broader "no-hire, no-fire" economic scenario where companies, despite low layoff rates, are hesitant to bring on new staff. The New Orders Index also dipped to 54.1 from 53.5, missing forecasts and suggesting future demand may be softening. This weakness in the labor and demand components provides ammunition for Fed officials arguing for a more patient approach to policy.

A Resilient but Strained Economy

The manufacturing sector’s performance fits within a broader economic narrative of resilience strained by specific headwinds. The US economy grew at a steady 2% annual pace in the first quarter, supported by a boom in artificial intelligence-related business investment, which surged 10.4%. However, the outlook is clouded. Joe Brusuelas, chief economist at RSM, downgraded his forecast for 2026 GDP growth to 1.7% from 2.4%, citing the oil supply shock from the Iran war. "A year that was set to benefit from tail winds associated with a large tax cut and boom in artificial intelligence-led investment has been partially derailed," Brusuelas said.

This article is for informational purposes only and does not constitute investment advice.