Strong manufacturing numbers mask a sector hedging against war and tariff uncertainty

Initial data from the S&P Global Purchasing Managers’ Index showed U.S. manufacturing output hit a nearly five-year high in June.

S&P Global Market Intelligence chief business economist Chris Williamson said the data reflects a real growth spurt. But that growth isn’t necessarily happening for the right reasons.

“There [are] some worrying signs here,” he said. “Since the outbreak of the war, there's been an increase in buying, not just to meet production needs, but to build some safety stocks, so precautionary stock building ahead of potential further supply problems, or further price rises.”

Erin McLaughlin, senior economist at The Conference Board, also has a hunch manufacturers are stockpiling.

“What we're not seeing is a strengthening of employment in that sector, and we're also not seeing really increased in demand at the consumer level,” she said.

And it’s not just the war that has companies nervous.

“Looking forward, there's uncertainty about what the tariff right rate may be,” McLaughlin said.

Zoom in on manufacturers in Maryland, the Carolinas and Virginia, and “prices that firms are experiencing have continued to increase due to conflict in Iran, and also additional tariffs,” said Jason Kosakow, survey director at the Richmond Federal Reserve.

Overall, he said, manufacturers in the region are optimistic. “Firms are very bullish about the next six months,” he said.

In the Midwest, manufacturers are reporting above-average growth, according to Thomas Walstrum with the Chicago Fed.

“Defense is a strong sector,” he said. “The other strong sector is products for data centers,” like semiconductors and building materials.