The April ISM reports confirm that the U.S. economy remains in expansion, though increasingly on borrowed momentum. Both manufacturing and services continue to grow, yet the composition of that growth is shifting in ways that matter for investors: input costs are reaccelerating sharply, forward-looking demand indicators are softening, and two distinct external shocks (the Iran War and residual tariff uncertainty) are reshaping how businesses plan and procure.
Manufacturing: Resilient on the Surface and Strained Underneath
The ISM Manufacturing PMI held at 52.7 in April, unchanged from March, marking the fourth consecutive month of expansion and the index’s highest reading since August 2022. At face value, this is an encouraging number. Demand remains constructive, with new orders rising to 54.1, growing for the fourth straight month, though ISM’s chair noted that a portion of that demand appears to reflect customers ordering ahead of anticipated price increases rather than underlying end-demand strength.
The more consequential development is the violent reacceleration in input costs. The Prices Index vaulted 6.3 points to 84.6, its highest reading since April 2022, driven by steel, aluminum, petroleum-based products, and energy volatility tied to the Iran conflict. This is not a gradual drift; it is a sharp inflection that compresses margins and complicates pricing decisions for manufacturers across the supply chain.
Critically, this inflation surge is occurring against a backdrop of persistent labor market weakness. Employment fell to 46.4 and has now been in contraction for 31 consecutive months. For every comment on hiring, there were 1.7 on reducing headcount, a deterioration from 1.2 in March. The combination of rising costs and declining employment suggests firms are absorbing inflation through margin compression and productivity rather than passing it fully through to customers or expanding capacity.
External demand is also under pressure. Export orders fell to 47.9, the second consecutive month in contraction, while customers’ inventories remained deeply in “too low” territory at 39.1, a signal that restocking demand may support near-term production but at the cost of front-loading future orders.
On the geopolitical backdrop, the data is stark: the Iran War was mentioned in 47% of manufacturing respondent comments, with tariffs referenced in 18%. Sentiment ran 69% negative to 31% positive, a ratio that underscores just how much uncertainty is weighing on business decision-making even as headline activity numbers hold up.
Services: The Engine Keeps Running, Though RPMs Are Dropping
The ISM Services PMI registered 53.6 in April, its 22nd consecutive month in expansion territory, though down modestly from 54.0 in March. Business activity accelerated, rising 2 points to 55.9, suggesting current activity is healthy across a broad range of industries. However, the forward signal is less encouraging. New orders dropped 7.1 points to 53.5, the sharpest three-year decline in the index, as the surge in prices appears to be weighing on consumer-driven order volumes.
Employment in services recovered modestly but remained in contraction. The index came in at 48.0, up from a concerning 45.2 in March, but still below the expansion threshold for a second consecutive month. This is notable: the services sector has been the primary engine of U.S. job creation for the past several years, and two consecutive months of contraction in this employment gauge, even mild ones, warrants monitoring.
The Prices Index held at 70.7, remaining above 70 for a second consecutive month, with firms citing higher fuel, gasoline, diesel, copper, and freight costs tied to the ongoing conflict, alongside aluminum and lumber cost increases from tariffs.
What This Means for Investors
The April ISM data does not signal a recession. It signals something potentially more challenging for markets to price: a late-cycle environment where growth continues but quality deteriorates. Output is expanding while employment weakens. Demand is positive but partly artificial, driven by front-loading rather than organic strength. Costs are rising faster than at any point in four years, and the two primary external shocks (energy-driven inflation from the Iran War and tariff-driven cost uncertainty) show no near-term signs of abating.
For portfolios, this backdrop favors businesses with genuine pricing power, lean cost structures, and limited exposure to commodity inputs. It argues for caution on companies reliant on consumer discretionary spending or on import-intensive supply chains. And it keeps the Federal Reserve in an uncomfortable position: growth is too solid to cut, but cost pressures are too persistent to ignore.
The expansion is intact. But the runway ahead looks narrower than the headline numbers suggest.
Sources: ISM® Manufacturing PMI® Report (April 2026); ISM® Services PMI® Report (April 2026).
Disclosure
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Facts presented have been obtained from sources believed to be reliable, though Gryphon cannot guarantee their accuracy or completeness. Gryphon does not provide tax, accounting, or legal advice. Individuals should seek such guidance from qualified professionals based on their specific circumstances.