The final month of 2025 left U.S. factories on uneasy footing. According to new data from the Institute for Supply Management (ISM), the country’s factory activity fell to its weakest level in more than a year, signaling a contraction that surprised many economists. The ISM Manufacturing Purchasing Managers’ Index, known widely as the PMI, slipped to 47.3 in December from 48.6 in November, its lowest reading since October 2024 and solidly below the 50 threshold that separates growth from decline.
At first glance, the number might seem abstract, but the trend behind it tells a simple story. America’s manufacturers have been feeling the pinch of slower new orders and higher input costs, two forces that often move in opposite directions. This time, they are squeezing companies at once. Factories are finding fewer buyers while paying more for the materials they need to produce.
A closer look at the ISM data shows one of the more troubling signs is the decline in new orders, which dropped to 45.5 in December. That figure, while seemingly academic, signals reduced demand across sectors such as machinery, electronics, and fabricated metals. Some of that weakness has been blamed on lingering import tariffs imposed during the Trump administration. Even years after those measures took effect, they continue to raise costs on imported components, especially from Asia, which feed into nearly every stage of the manufacturing process.
Prices paid by factories rose again in December, showing that inflationary pressures never entirely left the industrial supply chain. Although producer price inflation had cooled earlier in 2025, higher shipping costs and renewed demand for raw materials like steel and copper pulled input costs upward toward year’s end. Several manufacturers told ISM survey respondents that while consumer demand softened, suppliers were reluctant to cut prices, leaving companies caught between weakening orders and steady production expenses.
Taken together, these patterns reflect an economy that is cooling after two years of gradual recovery. Manufacturing only makes up about 11% of total U.S. economic output, but it remains a critical barometer of momentum because it reacts quickly to shifts in demand. A slowdown on assembly lines often foreshadows a broader deceleration in consumer spending or business investment.
The softness in December’s reading contrasts sharply with the strong growth recorded earlier in 2025, when factories benefited from rising inventories and stable energy prices. By the final quarter of the year, however, the mood had changed. Global trade remained fragile, with European demand easing and China’s industrial growth slowing. Many U.S. firms reported holding excess inventories accumulated during the second half of the year, leading to cutbacks in new production.
Economists generally do not see this downturn as a sign of recession, but rather as evidence of an economy adjusting to tighter financial conditions and global uncertainty. The Federal Reserve’s interest rates, while easing slightly in mid-2025, remain high enough to discourage borrowing for large capital investments. That slows activity in heavy industries like machinery and construction equipment, two sectors that normally anchor manufacturing growth.
There is also the question of tariffs. While policymakers have debated revising older trade measures, most remain in place. This has compounded costs for companies reliant on imported parts. Some manufacturers have responded by reshoring certain production processes, but rebuilding domestic capacity takes time. For now, many firms appear to be waiting for clearer signals before expanding or hiring.
From a broader perspective, the downturn reveals both the resilience and the limits of post-pandemic manufacturing recovery. Factories bounced back quickly when supply chains eased in 2023 and 2024, but the rebound relied heavily on pent-up orders and stable financing conditions. As those buffers fade, the sector faces a test of how well it can sustain itself on organic demand.
As 2026 begins, industrial executives will be studying whether this latest slowdown is a brief pause or the start of a longer cooling phase. For now, December’s data paints a cautious picture: a manufacturing sector under pressure from costs, policy, and shifting global demand, seeking its footing in a still uncertain economy.
