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US manufacturing expanded in February, but a sharp surge in input costs is reviving concerns about persistent inflation across the industrial economy. The Institute for Supply Management reported that its factory activity index held at 52.4, signaling a second consecutive month of expansion and one of the strongest readings in recent years. At the same time, its gauge of prices paid for manufacturing inputs jumped 11.5 points to 70.5, the highest level since 2022 when inflation last peaked.

The figures were compiled before US and Israeli airstrikes on Iran this past weekend, a development that has already disrupted global oil flows. The conflict has significantly curtailed tanker traffic through the Strait of Hormuz and pushed crude prices sharply higher, adding fresh uncertainty to cost forecasts for manufacturers.

For industrial executives and policymakers, the combination of steady output growth and escalating input costs presents a complex operating environment. Expansion is returning to the factory sector, but price pressures are intensifying just as energy markets face renewed geopolitical strain.

The ISM prices paid index at 70.5 reflects broad based cost acceleration. Producer price data released last week showed that the cost of unprocessed goods excluding food and energy rose more than 15 percent in January from a year earlier, the steepest annual increase since April 2022. A Bloomberg index tracking metals such as copper and aluminum has also climbed significantly this year.

Energy is now the central risk variable. Oil prices recorded their largest one day increase since early 2022 following the escalation in the Middle East. If higher crude prices persist, manufacturers may face sustained increases in fuel, transportation and petrochemical based inputs.

Susan Spence, chair of the ISM Manufacturing Business Survey Committee, said the impact will vary by sector and sourcing strategy. Companies heavily reliant on imported raw materials could face additional exposure if supply routes remain constrained. Supply managers are already navigating tariff related adjustments and shifting procurement strategies, and elevated energy prices add another layer of complexity.

Recent comments from ISM respondents illustrate the breadth of pressure. Manufacturers in transportation equipment reported that steel and aluminum produced domestically are now among the highest priced globally, citing tariff policies as raising acquisition costs while weighing on demand and profitability. Firms in machinery and computer and electronic products echoed concerns about tariff instability and rising metals prices. Others, including fabricated metal products, reported improving backlogs and steady business conditions, suggesting demand resilience even as costs climb.

The resurgence in input prices is unfolding against a backdrop of cautious monetary policy. After three consecutive rate cuts at the end of 2025, Federal Reserve officials have signaled little urgency to ease further. Persistent cost pressures, particularly in producer prices, reinforce concerns that inflation could stabilize at an elevated level rather than return decisively to target.

Treasury yields rose following the ISM release, reflecting expectations that the central bank may maintain restrictive policy longer than previously anticipated. Equity markets were weaker, with the S and P 500 remaining under pressure amid geopolitical and inflation concerns.

The interplay between tariffs and global commodity prices further complicates the outlook. Higher import duties implemented by the Trump administration have contributed to rising input costs for certain categories of goods. For manufacturers, this means cost management strategies must account for both policy driven and market driven variables.

Order backlogs increased notably in February, with the ISM measure rising 5 points to the highest level since May 2022. Supplier delivery times also lengthened, reaching their highest reading since May. While longer delivery times can signal strong demand, they may also indicate renewed supply chain friction as companies adjust sourcing patterns.

Employment in the factory sector remains subdued but is stabilizing. The ISM employment index improved to 48.8, the highest in a year, though still below the threshold that indicates expansion. Nearly one in five respondents reported higher employment in February, the largest share since 2022. The upcoming Bureau of Labor Statistics jobs report will offer additional clarity on whether manufacturing payrolls are poised to recover.

For C suite leaders, the February data underscores the delicate balance facing US manufacturing. Output growth has resumed, supported by solid orders and production gains. Yet input costs are rising at a pace not seen in several years, even before accounting for potential prolonged energy disruption stemming from the Iran conflict.

If oil prices remain elevated and metals continue to appreciate, producers may have little choice but to pass higher costs through to customers. The durability of the manufacturing recovery will therefore depend not only on demand conditions but also on how effectively companies manage procurement, pricing and supply chain strategy in an increasingly volatile global environment.

Sources

Financial Post