The Institute for Supply Management’s October surveys show both halves of the U.S. economy still expanding, but at different speeds. The ISM Manufacturing PMI rose a full point to 55.5, its tenth consecutive month above the 50 line that separates growth from contraction, and came in ahead of economists’ expectations. Two days later, the ISM Services PMI slipped to 54.5 from 54.9, a 28th straight month of growth that landed just below the consensus forecast of about 54.8. ISM’s historical mapping translates those readings into annualized real GDP growth of roughly 2.7% for the manufacturing gauge and 2.0% for services. S&P Global’s flash surveys painted an even stronger picture, with its manufacturing PMI at 56.0, the highest since May 2022, and a composite reading S&P says is consistent with fourth quarter growth near 5%. Taken together, the data leave little room for a slowdown narrative heading into year end.
The manufacturing gain was driven by output. ISM’s Production Index climbed 2.3 points to 59.0, its strongest reading since November 2021, and all five components of the PMI were in expansion for the month. New Orders edged up to 55.5, inventories rebuilt to 51.4, and customers’ inventories stayed too low at 41.6, a combination that typically supports further production in the months ahead. Services told a softer story: Business Activity fell 2.7 points to 53.8 and New Orders dropped 3.9 points to 55.9, both below their averages of the past year. Employment was the bright spot, rising to 51.4 for a second month of expansion after a stretch of contraction over the summer. One quirk flatters both headlines: the Supplier Deliveries index, which rises when deliveries slow, feeds directly into each composite. At 59.1 in manufacturing and 56.7 in services, slower deliveries are lifting the PMIs even though they reflect strain rather than strength.
The broader backdrop is an economy running hot on investment while grappling with supply constraints. Manufacturing respondents tied much of their demand to data centers, semiconductors, defense and municipal infrastructure, and the commodities ISM listed in short supply, including memory, electronic components, circuit boards, copper and steel, map closely onto the AI buildout. Tariffs and the Iran war remain the most cited headwinds, and ISM reported that two thirds of manufacturing panelist comments were negative, the third straight month of deteriorating sentiment even as activity improved. For the Federal Reserve, this is an awkward mix. Strong activity gives policymakers little reason to ease, while elevated input costs keep inflation risk alive. The hiring signals in both surveys point to modest job growth rather than a surge, which suggests wages are not yet the main inflation channel. Instead, the pressure is arriving through metals, energy and freight.
Prices are the unresolved problem. The manufacturing Prices Index registered 75.2, down from 77.9 but above 70 for a ninth consecutive month, with 16 industries reporting higher raw material costs and none reporting declines. In services, the Prices Index stood at 73.0, marking the 113th consecutive month of rising input costs, and not a single commodity was reported lower in price. ISM’s services chair, Steve Miller, noted that many firms have not yet passed tariff and fuel costs through to customers, which implies more pricing pressure ahead even if those costs stop rising. Services backlogs reached 58.0, the highest since July 2022, and together with slower deliveries they point to capacity that is tightening rather than easing. If demand holds while supply stays constrained, today’s margin squeeze could become tomorrow’s consumer price increases, the scenario that would most complicate the Fed’s path.
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