US manufacturing activity hits four-year high: What are the forces driving the surprise rebound

US manufacturing activity expanded at its fastest pace in four years in May, as the Institute for Supply Management’s (ISM) manufacturing PMI rose to 54.0—the highest level since May 2022. This marks the fifth consecutive month of growth, defying expectations amid higher costs, supply chain disruptions, and economic uncertainty. A key driver behind the rebound is surging demand for artificial intelligence-related infrastructure, including data centers and semiconductor equipment. This AI investment cycle has provided steady business for manufacturers, offsetting challenges in other sectors facing elevated borrowing costs and inflation. Businesses are accelerating orders to avoid rising prices, with new orders increasing at the fastest pace in four months. However, backlogs have also grown, indicating customers are placing orders earlier than usual to secure supplies before further cost hikes. The US-Israel conflict with Iran has exacerbated disruptions, particularly by restricting shipping through the Strait of Hormuz, which has raised costs for energy, aluminum, and fertilizers while extending supply chain delays. Despite a slight easing in input inflation, cost pressures remain historically high, with manufacturers reporting sharp increases in material expenses. These elevated costs risk being passed to consumers, worsening inflation concerns already reflected in recent data showing price growth at its fastest pace in years. This could prolong elevated interest rates. While trade policies and tax incentives have stabilized the manufacturing environment, supply chains remain under strain. Hiring in the sector has yet to recover, with employment still contracting despite stronger production and rising orders.