U.S. Manufacturing Output Stagnates in May After April Surge Amid AI Investment and Geopolitical Uncertainty

The Federal Reserve reported that U.S. factory production was unchanged in May, following an upwardly revised 0.7 % rise in April. On a year-over-year basis, manufacturing output rose 1.4 % in May, while the broader industrial production index increased 0.1 % month-over-month, its third gain in four months. Capacity utilization held at 75.7 % for manufacturing and 76.2 % for total industry, both below their long-run averages.

Reuters

The flat reading arrived as the United States and Iran agreed to end hostilities in the Middle East and reopen the Strait of Hormuz, easing supply-chain concerns that prompted firms to pre-order inventory in February. Simultaneously, an artificial-intelligence (AI) spending boom and business-equipment tax credits have buoyed sectors such as semiconductors, computer equipment, and defense manufacturing, offsetting drag from recent oil-price shocks and import tariffs.

Reuters

Durable-goods manufacturing grew 0.8 % in May, led by motor vehicles and parts (+1.2 %), computer and electronic products (+0.9 %, 10.3 % YoY), and semiconductors (+2.4 % MoM, 14.4 % YoY). In contrast, non-durable goods fell 0.9 %, with declines in food, beverages, tobacco, petroleum and coal products, chemicals, and plastics & rubber. Wood products posted a 2.3 % monthly gain, while primary metals rose 1.3 %. The New York Fed’s Empire State Manufacturing Survey recorded a 14-point drop in general business conditions to 5.7 and a four-year low in supply-availability, though future selling-price expectations hit their highest level since 2022.

Reuters

The mixed performance suggests that AI-driven and defense-related production is sustaining overall industrial growth, while weakness in consumer-facing and non-durable sectors limits broader momentum. The modest rise in capacity utilization indicates that factories are not yet operating at full potential, leaving room for further expansion if inventory cycles reverse and geopolitical tensions remain resolved.

US: industry cools and only rises 0.1% in May

Economists highlighted the role of inventory buildup ahead of potential Hormuz disruptions, noting that early ordering helped cushion May’s output. They also emphasized that continued AI investment and fiscal incentives are likely to keep high-tech manufacturing buoyant, while the war’s resolution could reduce uncertainty for future capital spending.

Reuters

Analysts warned that the oil-price shock could curtail further gains, and the Empire State survey’s deteriorating business-condition index may foreshadow a slowdown in June. The decline in non-durable production raises concerns about consumer demand and the resilience of supply chains for essential goods.

Reuters

Reuters’ poll of economists had forecast a 0.2 % rise in manufacturing after a previously reported 0.6 % April surge, yet the actual outcome was flat. Continuum Economics noted that the unchanged May figure is weaker than the ISM manufacturing index implied, suggesting divergent interpretations of underlying strength. No data were provided on the duration of the Hormuz agreement or on forthcoming AI-related policy changes.

Reuters

• “Many businesses have feared since February that the sudden closure of the Strait of Hormuz would trigger supply chain disruptions later this year, and so placed orders with manufacturers early,” — Samuel Tombs, chief U.S. economist, Pantheon Macroeconomics

Reuters

• “While much of this investment is imported, domestic production of these goods has also been rising and will likely continue to boost total manufacturing activity in coming months,” — Veronica Clark, economist, Citigroup

Reuters

• “The resolution of the war, if it sticks, will reduce the drag from uncertainty on business investment decisions, while tailwinds from AI and fiscal policy keep certain sectors buoyant,” — Matthew Martin, senior U.S. economist, Oxford Economics

Reuters

• “firms widely expect to raise their prices over the next six months.” — New York Fed, Empire State Manufacturing Survey

Reuters

The Federal Reserve will release June industrial data later this month, and the U.S. Treasury’s upcoming assessment of the Hormuz agreement’s durability could influence inventory strategies. Continued monitoring of AI-related capital spending and defense contracts will be essential to gauge whether high-tech manufacturing can sustain the modest overall growth observed in May.

Reuters