Factories Just Had Their Best Month in Four Years. They Did It Without Hiring.

The ISM Manufacturing PMI rose to 54.0 in May, the highest since May 2022, per ISM. New orders hit 56.8. Production accelerated. And the employment subindex contracted for the 32nd consecutive month. The factory sector is expanding at its fastest pace in four years with fewer workers every month.

At 10:01 a.m. Eastern on Monday, the ISM released the May Manufacturing PMI. The headline number was 54.0, up from 52.7 in April. Susan Spence, Chair of the ISM Manufacturing Business Survey Committee, called it the strongest reading since May 2022. Fifth consecutive month of expansion. New orders rose to 56.8 and production climbed to 54.3. The market liked what it saw. The S&P 500 closed at 7,600.

Then you read the subindices, and the story changes.

Thirty-two months. That is how long the ISM Manufacturing Employment Index has been in contraction. It registered 48.6 in May. It has not been above 50 since September 2023. Every month since then, the manufacturing sector has expanded output while shedding workers. Five consecutive months of headline expansion. Thirty-two consecutive months of employment contraction. Those two numbers came from the same report.

The traditional reading of ISM 54.0 is that factories are busy, demand is strong, and the industrial economy is pulling its weight. That reading is correct, as far as it goes. But it assumes that factory expansion translates into hiring. It has not, for nearly three years. Output per worker is rising while headcount falls. Supplier deliveries held at 60.6, meaning longer wait times, the highest since May 2022. Factories are running hotter with fewer people and slower supply chains.

Where the cost pressure is building. The ISM Prices Paid Index registered 82.1 in May. That is down slightly from 84.6 in April, but it remains the second-highest reading since April 2022. In March, the index hit 78.3, already a four-year high driven by the Iran conflict. In April it spiked to 84.6. In May it eased to 82.1 but the three-month average is now above 81. For context, the all-time peak was 92.1 in June 2021. That was the month before inflation forced the Fed into its most aggressive tightening cycle in 40 years. Today’s reading is 10 points below that peak. It is also 20 points above the long-run average of roughly 60, per ISM’s historical data.

The combination is what matters. Rising output, falling headcount, and surging input costs is not a growth profile. It is an efficiency squeeze. Companies are producing more because they expect costs to keep climbing, and they are cutting labor to protect margins. The ISM’s own survey confirmed the tension. Panelists reported a 1.75-to-1 ratio of positive to negative comments on production. But two-thirds of all comments in the March report were negative overall. The Iran war, energy costs, and supply-chain disruptions dominated the complaints even as order books filled.

What Friday’s payrolls report will test. The ISM employment subindex covers only manufacturing, roughly 8% of total nonfarm payrolls. But it has been a leading indicator before. In late 2007, manufacturing employment turned negative months before the broader labor market rolled over. The current streak is longer. If Friday’s nonfarm payrolls report shows weakness beyond manufacturing, the picture changes. The 2.6% saving rate and 32 months of contracting factory employment start to look like pieces of the same story. If payrolls hold, the factory-specific contraction can stay contained. JOLTS data lands this morning at 10 a.m. and will give the first look at whether the “low hire, low fire” labor market is holding or fraying.

The base case here is that the ISM headline is real. Factories are genuinely expanding. But they are expanding by producing more with fewer workers while paying more for inputs. That is a productivity story with an expiration date. Margins compress when input costs rise faster than output prices, and the Prices Paid index says they are. My read: ISM 54 is the number that will make the headlines. Employment at 48.6 for 32 straight months is the number that belongs on Warsh’s desk.