US Factories Are Booming, and That's Part of the Fed's Problem

American manufacturing is having its best run in years. The Institute for Supply Management’s October survey, released Monday, put its headline index at 55.5, up from 54.5 in September and above economists’ expectations. It’s the tenth straight month of expansion. The production index jumped to 59.0, its highest since November 2021.

Readings above 50 mean activity is expanding. Anything in the mid-50s is a strong reading. ISM says October’s level has historically corresponded to annualized real GDP growth of about 2.7%.

The details beneath the headline

Component	October	September
New orders	55.5	55.3
Production	59.0	56.7
Employment	52.4	52.7
Prices paid	75.2	77.9
Inventories	51.4	48.6
Backlog of orders	54.6	56.4

Twelve of eighteen manufacturing industries grew. Factories are rebuilding inventories, and their customers say their own stocks are still “too low.” That combination usually means more orders ahead.

Why strong data is complicated right now

In a normal cycle, a booming factory sector is straightforwardly good news. This isn’t a normal cycle. The Federal Reserve raised rates in September and held last week with two officials voting for another increase. Its concern is that a hot economy and expensive energy together keep inflation from returning to 2%.

The ISM report feeds that concern in two ways.

Prices. The prices index fell 2.7 points to 75.2, which sounds like relief. But any reading above 50 means prices are still rising. This one has been above 70 for nine months and has shown increases for 25 consecutive months. Not a single industry reported paying lower prices for raw materials in October. The fall only means prices rose a bit less broadly than in September.

Demand. Production at a four-year high and inventory rebuilding mean companies are competing for materials, freight and workers. Supplier deliveries are still slowing (an index of 59.1), a classic sign of capacity strain. Strain like that is how cost increases get passed on.

Listen to the respondents

ISM publishes anonymous comments from purchasing managers, and October’s are more revealing than the numbers:

• From food and beverage: “Diesel rates and the trucker shortage are impacting costs beyond the raw material inputs to levels I have never seen.”
• From miscellaneous manufacturing: “Any commodity consumed by AI/data centers is in a crunch, both for supply and pricing.”
• From fabricated metals: “Canadian tariffs continue to damage small U.S. businesses selling into that important market.”

The second quote ties the factory data to the biggest market story of the season. Spending on AI data centres is straining tech companies’ cash flow, and the same spending is pushing up prices for power equipment, cooling systems, copper and other inputs across the industrial economy.

ISM’s chair, Susan Spence, also flagged that sentiment has worsened for three straight months. Negative comments outnumbered positive ones roughly two to one. Strong activity paired with gloomy managers is unusual. It suggests businesses are busy but uneasy about costs, tariffs and the war with Iran.

The Canadian angle

The comment about Canadian tariffs is a reminder that trade friction runs both ways. The Bank of Canada said last week that new US tariffs are expected to slow Canadian growth this quarter. A strong US factory sector usually lifts Canadian exporters of parts, metals and energy. Tariffs on both sides blunt that link.

What to watch

• ISM Services on Wednesday. Services are most of the US economy. If they show the same mix of strong activity and high prices, a December Fed hike becomes more likely.
• Friday’s jobs report. Factory employment is still growing, but slowly. Consensus for overall October payrolls is a modest 55,000.
• Oil. Monday’s 7% plunge in crude would, if it holds, ease the diesel and freight costs respondents are complaining about. That would be the quickest route to cooler prices in next month’s survey.