Iran War Impact Emerges? U.S. Manufacturing Output Unexpectedly Stagnates in May

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After four consecutive months of expansion, U.S. manufacturing suddenly stalled in May, with declines in chemical and petroleum product output becoming a major drag and the impact of war on supply chains beginning to emerge.

Data released by the Federal Reserve on Monday showed that U.S. factory output in May was almost flat compared to the previous month, far below the median increase of 0.3% expected in a Bloomberg survey of economists. April’s figure was revised up to 0.7%. There was obvious divergence within manufacturing—durable goods production maintained momentum, while non-durable goods weakened due to the drag from chemicals and petroleum products.

Bloomberg economist Stuart Paul said that data center construction and some reshoring investments are driving capital expenditure plans, with durable goods manufacturing supporting the overall trend of industrial output. "But this is far from a full-fledged revival of manufacturing. We estimate that only about one-third of categories saw growth."

Meanwhile, another New York Fed Empire Index released on the same day showed factory activity in New York state fell back again in June after a strong rebound in May. The future selling price index climbed to the highest level since 2022. The New York Fed report noted this "suggests businesses broadly expect to raise prices in the next six months," and signs of inflation pressure transmission are worth paying attention to.

War hits supply chains, chemicals and petroleum hardest

The central issue behind the current stagnation in manufacturing output lies in the significant blow to the non-durable goods sector. Output of chemicals and petroleum products declined; output of synthetic dyes and pigments fell by a cumulative 5.5% over the past three months. Fed data shows this may relate to supply chain disruption triggered by war.

Recent industry surveys had sent relatively optimistic signals—customers stocking up early due to war, increased defense orders, and sustained data center construction together boosted manufacturing activity indicators.

However, current data suggests the negative impact of supply chain disruptions is spreading across sectors. Producer prices in May rose at the fastest year-on-year pace since 2022, and the transmission effect of supply chain interruptions on inflation is broadening.

Data centers and defense sectors grow against the trend

Despite overall stagnation, two structural growth engines still stand out. Computer and electronic product output grew more than 4% over the three months ended in May, the biggest increase in nearly five years. The boom in data center construction continues to drive related manufacturing.

Output of defense and aerospace equipment rose for the sixth consecutive month, reaching the highest level since December 2019. Economists believe that the need to replenish ammunition consumed by war, as well as expanded export potential under recent trade agreements, will be among key drivers of manufacturing growth this year.

There are also positive signals in the energy sector. Oil and gas drilling activity in May grew by 5% month-over-month, the largest single-month increase in more than four years, indicating that U.S. shale oil firms have begun to respond to higher oil prices with increased production. Overall industrial production (including utilities and mining) rose by 0.1% month-over-month in May, with factory capacity utilization basically unchanged.

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