US manufacturing contracts for sixth month, misses estimates

US manufacturing activity contracted for the sixth consecutive month in August as factories continued to feel the effects of import tariffs, according to survey data released Tuesday.

The Institute for Supply Management (ISM) reported that its manufacturing Purchasing Managers’ Index (PMI) edged up to 48.7 from 48.0 in July.

A reading below 50 indicates contraction. Manufacturing accounts for 10.2% of the U.S. economy.

Economists surveyed by Reuters had projected the PMI would rise to 49.0.

The data highlight that while the sector remains under pressure, the decline has moderated slightly.

AI spending provides a cushion

Despite the weakness in headline activity, businesses have been stepping up spending on artificial intelligence-related products, which has offered some support to segments of the industry.

According to the data, spending on intellectual property products increased at its fastest pace in four years during the second quarter, with equipment investment also showing strength.

Economists expect the AI-related investment surge to persist.

Factories are also expected to benefit from accelerated depreciation allowances included in President Donald Trump’s tax and spending legislation.

Signs of some improvement

There were some positive signs in August. The ISM gauge of new orders rose for the first time this year, climbing 4.3 points to 51.4.

This marked the largest increase since early last year.

At the same time, the survey’s measure of prices paid for raw materials declined to 63.7, the lowest since February, following a sharp drop in July.

While still elevated, the decrease suggests that tariff-induced volatility in input costs may be easing.

Economists, however, believe goods prices are likely to accelerate in the second half of 2025 as the effects of tariffs continue to filter through supply chains.

Production and employment weaken

Not all indicators were positive. The production index fell to 47.8 from 51.4 in July, indicating renewed contraction.

Factory employment remained subdued, with the ISM noting an acceleration of headcount reductions due to uncertain demand in the near to mid-term.

The survey also showed supplier deliveries slowed, with the index rising to 51.3 from 49.3.

While longer delivery times can signal stronger demand, they also contribute to elevated input prices for manufacturers.

Government data released last week showed consumer spending rose in July at the fastest pace in four months, helped by purchases of big-ticket items such as automobiles.

However, the ISM survey indicated that ten industries contracted last month, led by makers of paper products, wood, plastics and rubber, and transportation equipment. Seven industries reported expansion.

The ISM also noted that order backlogs continued to shrink at a faster pace, helping explain the weakness in factory employment.