Manufacturing Sector Contracts Further

Economic activity within the U.S. manufacturing sector contracted again in October 2025, with the ISM® Manufacturing PMI® registering 48.7%. This marks the eighth consecutive month the index has remained below the neutral 50 threshold, signaling a persistent downturn in manufacturing activity. After a brief period of stabilization, the sector is once again facing headwinds, as the latest report shows renewed and broad-based softness in demand, output, and employment. The modest decline from 49.1% in September to 48.7% in October underscores the ongoing challenges manufacturers are experiencing across the board.

This extended contraction follows a distinctive pattern over the past few years, characterized by two brief months of growth amid an otherwise sluggish and uneven expansion. Despite these challenges, the broader U.S. economy has continued to expand for a 66th consecutive month. Historically, a Manufacturing PMI® reading above 42.3% over time indicates overall economic growth, helping explain why other sectors remain relatively resilient — even as manufacturing continues to lag in the current cycle.

Key Index Trends

The October ISM® report provides a detailed view of the factors weighing on the sector. The New Orders Index contracted for a second straight month, rising slightly to 49.4% from 48.9% in September, indicating a minor slowing in demand deterioration. The Production Index slipped into contraction territory, registering 48.2% versus 51.0% the prior month — a more pronounced pullback in output.

The Employment Index, though still contracting at 46.0%, improved modestly from 45.3% in September. This suggests that while companies continue to reduce labor capacity, many are managing headcount conservatively rather than implementing broad layoffs. Notably, 67% of respondents reported maintaining current staffing levels, reflecting widespread caution toward workforce expansion amid an uncertain outlook.

Supplier deliveries slowed for a third consecutive month, with the Supplier Deliveries Index rising to 54.2%. Within the ISM® survey, a reading above 50 indicates slower deliveries — a counterintuitive measure, as such slowdowns can also occur during periods of strong demand. In this case, however, the delays are primarily linked to logistical bottlenecks and transportation constraints.

Inventories of raw materials declined further, as the Inventories Index fell to 45.8% from 47.7%, signaling faster destocking. Meanwhile, customers’ inventories remained “too low,” a condition that could support future production increases — but only if demand meaningfully improves.

Sector and Industry Impacts

On the pricing front, input costs continue to pressure margins. The Prices Index stayed elevated at 58.0%, though down from 61.9% in September, suggesting a moderate easing in cost increases. Suppliers and producers still report broad-based price pressures, which continue to weigh on profitability even as inflationary intensity shows signs of cooling.

Export and import activity both contracted, with the New Export Orders Index rising slightly to 44.5% (from 43.0%) and the Imports Index increasing to 45.4% (from 44.7%). This persistent weakness reflects subdued global demand and the compounding effects of ongoing trade disputes, export controls, and tariff measures. Respondents frequently cited tariffs, rising input costs, and sourcing challenges tied to policy uncertainty as key constraints.

Industry-level performance remains uneven. Among the six largest manufacturing categories, only Food, Beverage & Tobacco Products and Transportation Equipment expanded. Most others, including Machinery, Chemicals, Electronics, and Apparel, continued to report declining sales, higher input costs, and uncertainty surrounding material availability and pricing.

Survey commentary reinforced these trends. Respondents pointed to declining domestic demand, unsold raw material inventories, and postponed or canceled orders driven by both global uncertainty and the volatile U.S. tariff environment. 

Weakness in automotive and industrial divisions persisted, with several noting that sales are “running below expectations” and the near-term outlook is “not looking better.” Persistent softness in agricultural exports was also cited, with reduced foreign demand and lower commodity prices constraining investment in machinery and equipment.

Broader Market Implications

For investors and financial professionals, the October ISM® Manufacturing PMI® reinforces the case for a cautious stance toward manufacturing and industrial exposures. The broad-based contraction highlights the importance of carefully balancing sector allocations within portfolios. Industrial, materials, and manufacturing-adjacent equities may remain under pressure if earnings forecasts adjust downward to reflect weaker demand and margin compression.

While persistently low customer inventories could eventually spur a production rebound, such a recovery depends on a broader improvement in demand conditions. Until then, many firms will likely focus on inventory reduction rather than output expansion. Moderating price increases offer limited relief, but input costs remain elevated, requiring companies to rely on pricing power or operational efficiency to sustain margins.

The contraction in exports and imports underscores global economic softness as a key headwind for U.S. manufacturers. This theme is evident not only in index data but also in respondent commentary on trade volatility, tariffs, and commodity price swings. Concerns over Chinese export controls, shipping constraints, and reciprocal trade measures further complicate supply chain stability.

Of note, the share of manufacturing GDP in contraction eased from 67% in September to 58% in October, yet the portion in “strong contraction” (defined as a composite PMI® at or below 45) rose sharply to 41%, signaling deeper stress among the most vulnerable manufacturers and supply chains.

Portfolio Positioning and Strategy

Investors should remain diversified, maintaining a defensive orientation toward sectors less exposed to cyclical and trade-related risks. The ongoing contractionary backdrop suggests overweighting companies with strong balance sheets, effective cost management, and resilient supply chain operations. Sectors benefiting from secular growth drivers — such as technology, select healthcare, and consumer staples — may offer relative stability amid ongoing manufacturing weakness.

The persistence of input cost pressures reinforces the advantage of allocating toward firms capable of passing through costs or optimizing procurement efficiencies. Within the industrial complex, businesses aligned with expanding sub-industries like Food, Beverage & Tobacco Products or transportation equipment may continue to outperform their peers.

In summary, the latest PMI® data underscores the importance of prudent portfolio construction and disciplined risk management. For clients and investors, this environment presents both heightened risks and selective opportunities. Close monitoring of supplier trends, inventory dynamics, and global trade developments will remain essential in the months ahead. Manufacturing’s challenges now represent a persistent structural headwind, making sector vigilance, diversification, and adaptability vital components of investment strategy.  

Source: Institute for Supply Management

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