US manufacturing stalls in May as Iran war disrupts supply chains

US factory output went nowhere in May, missing estimates for a fourth straight month of gains as the Iran war's supply-chain disruptions began to bite.

The Federal Reserve reported Monday that manufacturing output was flat month-over-month in May, falling short of the 0.3% gain economists had projected and snapping a four-month streak of expansion that had lifted hopes for an industrial recovery.

"The manufacturing sector is feeling the full force of the Middle East conflict through higher input costs and delayed deliveries," said James Okafor, macro analyst at Edgen. "What started as an energy shock is now propagating through the industrial supply chain."

April's reading was revised up to 0.7%, making the May stall more pronounced. Total industrial production, which includes utilities and mining, eked out a 0.1% gain. The flat reading comes as the Iran war has pushed global oil inventories toward multiyear lows, with OECD stockpiles draining at a record pace of 6.3 million barrels a day in the second quarter, according to the U.S. Energy Information Administration.

The stagnation raises the risk that the broader economy is losing momentum just as the conflict enters its fourth month. US inflation has already climbed to 4.2% from 2.4% in February, and the European Central Bank raised rates by 25 basis points last week to 2.25%. If manufacturing continues to soften, the Federal Reserve may face a difficult choice between fighting inflation and supporting growth.

The manufacturing data is the latest sign that the war's economic toll is spreading beyond energy markets. The World Bank warned last week that global growth could fall to 1.3% this year if disruptions persist, calling it "the biggest supply shock in more than 50 years." China's producer price inflation jumped to 3.9% in May from negative 0.9% in February, signaling that cost pressures are migrating through global supply chains from the world's manufacturing hub.

The UK economy contracted 0.1% in April, the first monthly decline since August, as the Office for National Statistics cited the Middle East conflict for reduced turnover across manufacturing, wholesale and transportation services. Some businesses reported canceled sporting events in the Middle East had affected output of UK-based entertainment and recreation firms.

Oil markets have partially adjusted — Brent crude has fallen back below $90 a barrel from nearly $120 in March — but the reprieve may be temporary. US crude inventories at two key hubs stand at 351 million barrels, approaching the 325 million "danger zone" where logistical bottlenecks and price spikes become more likely, according to S&P Global Energy. Senior oil executives have warned the White House that the Strategic Petroleum Reserve is running "dangerously low," with one telling CNN that "July is likely the pain point when the market turns."

For manufacturers, the immediate challenge is cost. Diesel and gasoline prices remain elevated, raising the expense of moving raw materials and finished goods. The trucking industry, which moves the bulk of US freight, is facing higher fuel bills after years of weak demand forced carriers to reduce fleet sizes. Rail networks are also passing on fuel surcharges to grain and chemical shippers, squeezing margins across the agricultural supply chain.

The last time US manufacturing output stalled for multiple months was during the 2022-2023 rate-hiking cycle, when the Fed lifted the federal funds rate to 5.25-5.50%. That episode ended with a mild industrial recession that lasted three quarters. The current shock is different in origin — geopolitical rather than monetary — but the downstream effects on factory activity may prove similar, with the added risk that higher energy prices could persist as long as the Strait of Hormuz remains closed.

Looking ahead, the next major data point will be the June manufacturing PMI from S&P Global and the Institute for Supply Management, due in the coming weeks. If those surveys show further contraction, it would reinforce the view that the industrial sector has entered a downturn driven by geopolitical factors beyond the Fed's control. Markets are already pricing a higher probability of rate cuts by year-end, though the persistence of inflation above 4% complicates that outlook.

This article is for informational purposes only and does not constitute investment advice.