US Manufacturing Expansion Slows in August as Tariff Friction and Energy Shocks Keep Input Costs Stubbornly High

US Manufacturing Expansion Slows in August as Tariff Friction and Energy Shocks Keep Input Costs Stubbornly High

The U.S. manufacturing sector experienced a moderation in growth in August 2026, as supply chain bottlenecks, tariff friction, and energy shocks weighed on factory activity. According to the Institute for Supply Management (ISM) report released on September 1, 2026, the Manufacturing Purchasing Managers Index (PMI) fell to 54.6% last month from July's near four-year high of 55.6%, missing market expectations of 55.2%.

While the reading marks the eighth consecutive month of manufacturing expansion (composite index > 50%), key sub-indices reveal mounting stagflationary pressures at the factory gate:

• Cooling Demand: The New Orders Index fell to 53.7% in August, down 3.0 percentage points from July's 56.7%, indicating that higher prices are beginning to cool customer demand.
• Worsening Bottlenecks: The Supplier Deliveries Index rose to 59.3% from 58.9% (readings above 50% indicate slower deliveries), pointing to worsening supply chain disruptions and extended lead times.
• Elevated Input Costs: The Prices Paid Index held flat at a very high 71.1%, indicating that manufacturers are facing relentless price increases for raw materials.

Core Drivers of Factory-Gate Inflation

The survey highlights three major forces driving up input prices and squeezing corporate profit margins:

1. Section 232 Tariffs: Manufacturers of transportation equipment and primary metals reported that high steel and aluminum prices due to import duties are making profitability a major challenge.
2. The Strait of Hormuz Conflict: The ongoing war with Iran and shipping disruptions have escalated fuel costs and extended logistics lead times. Chemical manufacturers reported they are "struggling to compete when prices escalate due to things like tariffs and the conflict in the Strait of Hormuz."
3. The AI Hardware Boom: The massive buildout of artificial intelligence infrastructure is driving severe shortages of semiconductors and memory components.¹ One computer and electronics manufacturer noted that the electronics market is "going through another crisis even bigger and more complicated than during and post COVID-19."

Implications for Monetary Policy

The combination of slowing factory growth and flat, highly elevated input prices presents a significant challenge for the Federal Reserve. The persistent price pressures suggest that inflation is broadening out through the supply chain rather than cooling down. This data reinforces the hawkish stance of Fed Chairman Kevin Warsh and supports the case for a September 16 interest rate hike, as the Fed seeks to anchor inflation expectations before supply-side shocks entrench themselves in the broader economy.