U.S. factory activity hits 3.5-year high, but Iran war stokes supply chain fears

U.S. manufacturing expanded in March for the third consecutive month, with the ISM Manufacturing PMI rising to 52.7% — its highest reading since August 2022 — but the Iran war drove input prices to their steepest level in nearly four years and introduced fresh disruptions to supply chains.

The index rose 0.3 percentage points from February's 52.4%, according to the Institute for Supply Management. The March figure corresponds to an annualized 1.8% increase in real GDP, ISM said.

The Prices Index jumped 7.8 percentage points to 78.3% in March, its highest reading since June 2022, when it registered 78.5%. In just two months, the index has climbed 19.3 percentage points. The increase was driven by higher steel and aluminum prices, tariff-related costs, and petroleum-based product inflation tied to the Middle East conflict, ISM said. No commodities were reported down in price in March.

The Supplier Deliveries Index rose to 58.9% — a 3.8-percentage-point increase from February — indicating the slowest delivery pace in four months. No manufacturing industry reported faster deliveries in March.

March marked the first ISM report in which panelists cited the Iran war as a direct business impact. Among all respondent comments, 64% were negative. Of those negative comments, roughly 40% referenced the war and about 20% cited tariffs, with some panelists referencing both in a single comment.

"Current Middle East unrest is already starting to impact business operations by increasing lead times, costs, container delays and the like," one respondent in the Food, Beverage & Tobacco Products sector said in a statement. A Chemical Products respondent noted that "geopolitical tensions related to the conflict in Iran are contributing to rising manufacturing supply costs."

A Plastics & Rubber Products respondent described "shipping blockages" affecting Middle Eastern and Asian producers, with global customers for packaging resins turning to North and South America to cover supply needs.

Not all sentiment was negative. New Orders expanded for a third straight month, registering 53.5%, and production grew for a fifth consecutive month at 55.1%. One machinery sector respondent cited a strong construction market driving higher customer orders and production volume.

Some respondents also noted relief from the Supreme Court's ruling striking down International Emergency Economic Powers Act tariffs. "Lots of relief from Supreme Court striking down (emergency) tariffs, particularly with organic cane sugar from Brazil," a Food, Beverage & Tobacco Products respondent said.

Employment remained in contraction for a 30th straight month, with the index dipping slightly to 48.7%. Among respondents, 55% said managing head counts — rather than hiring — remained the norm at their companies.

The Iran war has added to economic pressures already building before the conflict began. The Strait of Hormuz remains closed following Iranian action taken after U.S. and Israeli strikes, causing a supply shortage of approximately 11 million barrels of oil daily. The national average gas price rose to near $4 per gallon, up from $2.98 a month earlier, according to AAA data cited in prior Quartz coverage. Consumer sentiment has fallen sharply, with a University of Michigan report showing a 6% drop in March compared to February, driven in part by rising gas prices and financial market volatility tied to the conflict.

According to Bloomberg, even before U.S. and Israeli forces struck Iran, American manufacturers were already grappling with input costs rising at their fastest pace in about three years, according to ISM data. S&P Global $SPGI's US Flash PMI for March showed supplier delivery times stretching to their longest in over three years, with both input costs and output prices continuing to climb amid persistent turbulence in oil markets.

S&P Global Market Intelligence's chief business economist Chris Williamson said companies were absorbing demand pressure from the war's compounding effects on uncertainty and consumer purchasing power.