U.S. manufacturing activity continued to expand in June but at a slower pace than the previous month, as elevated input costs and geopolitical disruptions from the Middle East conflict weigh on the sector's momentum.

The Institute for Supply Management's Manufacturing PMI registered 53.3 percent in June, down 0.7 percentage points from May's 54.0 reading, according to data released this week. The result marks the sixth consecutive month of expansion—readings above 50 indicate growth—though the pace fell short of economists' expectations for 53.8.

Production Slows, But Demand Holds

The production index declined to 52.2 in June from 54.3 in May, representing the slowest pace of production expansion since December. Still, factories have now recorded eight consecutive months of production growth, demonstrating underlying resilience despite mounting headwinds.

New orders remained robust at 56.0, down slightly from 56.8 in May, marking six straight months of order growth after four consecutive months of contraction earlier in the year. The healthy order pipeline suggests manufacturers will have work to keep production lines running through the summer months.

Employment Remains Stubborn Challenge

The employment picture painted a more concerning portrait. Manufacturing employment contracted for the 33rd consecutive month, though the employment index improved to 49.7 from 48.6 in May—the slowest contraction pace since January 2025.

Factory managers continue navigating the difficult balance of maintaining output while controlling labor costs in an environment of persistent inflation. In June, 16.2% of respondents reported higher employment while 13.8% reported reduced hiring, reflecting the sector's cautious approach to workforce expansion.

Prices Drop But Remain Elevated

Perhaps the most notable development was the 9.1-point plunge in the prices paid index—from 82.1 in May to 73.0 in June, the largest monthly decline since July 2022. This suggests some relief on input cost pressures that have squeezed manufacturer margins for nearly two years.

However, a reading of 73.0 still indicates that raw materials prices rose for the 21st consecutive month. In June, 55.1% of respondents reported higher prices while only 9.2% saw price declines, underscoring that cost pressures persist even as they moderate.

Trade Dynamics Shift

Export orders contracted to 48.5 from 50.6, marking the third decline in four months. The Middle East conflict continues to disrupt shipping routes and raise logistics costs for American exporters seeking to reach global markets.

Imports remained in expansion territory at 52.9, essentially unchanged from May's 53.0 reading. This marks five consecutive months of import growth as manufacturers source materials from abroad to meet production demands.

Looking Ahead

Supplier deliveries fell to 57.4 from 60.6, indicating that the severe supply chain disruptions of recent years continue to ease. Suppliers are delivering materials faster than in previous months, though the process remains slower than historical norms.

Inventories climbed to 51.4 from 49.9, marking the first expansion in inventory levels since April 2025 as manufacturers rebuild buffer stocks depleted during the supply chain crisis.

The manufacturing sector enters the second half of 2026 on solid footing, but Federal Reserve Chair Kevin Warsh faces difficult decisions ahead. With prices still elevated and employment contracting, the path to a soft landing remains narrow. The modest slowdown in June's manufacturing activity will likely factor into policymakers' deliberations about the timing and pace of any future interest rate adjustments.