US manufacturing activity expanded in March by the most since 2022, with the ISM factory index rising to 52.7. However, manufacturers faced significant challenges as input costs surged, with the ISM's gauge of prices paid climbing 7.8 points to 78.3, the highest since mid-2022. Thirteen manufacturing industries reported growth, including primary metals and transportation equipment, while three noted contraction.

The surge in input costs stems directly from the war with Iran, which has effectively closed the Strait of Hormuz, a critical choke point for oil and other essential manufacturing materials. Beyond energy disruptions, the blockade affects aluminum, fertilizer, and helium used in semiconductor production. Supply chain disruptions have become severe, with 64% of manufacturer comments being negative, primarily citing the Middle East conflict.

Higher input costs are likely to push manufacturers to raise prices, suggesting inflation will run hotter through the year. Economists have already revised up their inflation forecasts based on these developments. The ISM report showed new orders and backlogs grew at a slower pace, while factory employment remained stagnant, indicating continued headcount shrinkage despite uncertainty surrounding the Middle East war and tariffs.

Manufacturers remain hesitant to hire due to the "uncertainty now with the Middle East war on top of tariffs," according to Susan Spence. The conflict's impact extends beyond immediate disruptions, with Capital Economics noting that even with resolution, strong price pressures will persist due to displacement in global shipping networks and energy infrastructure damage.