America's manufacturing sector ended 2025 on a decidedly downbeat note, with the Institute for Supply Management reporting Monday that its Manufacturing PMI fell to 47.9% in December—the lowest reading of the year and the 10th consecutive month of contraction for the beleaguered industrial sector.

The reading came in below economist expectations of 48.3% and represents a 0.3-percentage-point decline from November's 48.2%, extending a streak of weakness that has gripped U.S. factories since early 2024. Any reading below 50 signals contraction, and December's figure marks the longest sustained downturn since the 2008-2009 financial crisis for the manufacturing sector.

Employment Plunges as Factories Shed Workers

Perhaps most concerning for workers and policymakers alike was the sharp deterioration in the employment sub-index, which fell to 44.9%—an alarming signal that factory layoffs are accelerating as companies respond to weakening demand and elevated interest rates.

"The employment number is what should have everyone's attention," said Susan Spence, Chair of the ISM Manufacturing Business Survey Committee. "At 44.9%, we're seeing manufacturers actively reduce headcount, not just freeze hiring."

The employment figure takes on added significance ahead of Friday's December jobs report, which is expected to confirm 2025 as the weakest year for hiring since 2009. Manufacturing job losses have been a persistent drag on the broader labor market, contributing to the unemployment rate's climb to 4.6% in November.

Only Two Industries Report Growth

The breadth of the manufacturing weakness was on full display in December, with only two of the survey's 18 industries reporting expansion: Electrical Equipment, Appliances & Components, and Computer & Electronic Products. Both sectors have benefited from the artificial intelligence investment boom, but even they face headwinds from uncertain trade policy.

Key sub-index readings painted a mixed picture:

  • New Orders: 47.7%, up slightly from 47.4% in November but still contracting
  • Production: 51.0%, one of the few bright spots as existing orders are fulfilled
  • Prices: 58.5%, unchanged and signaling persistent cost pressures
  • Inventories: 45.2%, down sharply from 48.9% as companies draw down stockpiles

Tariff Uncertainty Weighs on Orders

Survey respondents cited the uncertain tariff environment as a major factor suppressing new orders and investment decisions. With potential new tariffs on Chinese, Canadian, and Mexican goods still under debate, manufacturers have grown reluctant to commit to major purchasing or expansion plans.

"We're in a holding pattern. No one wants to order six months of inventory when the tariff situation could completely change the cost structure overnight."

— Anonymous survey respondent, Fabricated Metal Products sector

The elevated prices sub-index at 58.5% reflects manufacturers' struggle to absorb existing tariff costs while facing weaker demand. Many companies have reached the limit of their ability to pass through higher input costs to customers, squeezing margins further.

Fed Implications and Market Response

The weak manufacturing data adds complexity to the Federal Reserve's already delicate balancing act. While the soft industrial sector would typically argue for lower interest rates, the persistent elevation in prices and recent CPI readings above the Fed's 2% target have kept policymakers cautious.

Minneapolis Fed President Neel Kashkari said Monday that he believes the Fed is "pretty close to neutral" on rates and warned that further cuts might not be appropriate even as manufacturing struggles. The next FOMC meeting on January 27-28 is widely expected to result in unchanged rates.

Equity markets largely shrugged off the manufacturing weakness Monday, with the Dow Jones Industrial Average surging 700 points to a record high above 49,000, driven by bank stocks and energy companies rather than industrial names.

Outlook for 2026

ISM's broader forecast suggests economic improvement may come later in 2026, but the manufacturing sector faces a steeper climb than other parts of the economy. The combination of high interest rates, trade uncertainty, and a shift toward services spending has left factories as collateral damage in the post-pandemic economy.

For workers in manufacturing-heavy regions of the Midwest and South, the extended contraction means continued job insecurity and slower wage growth. Until demand recovers and trade policy stabilizes, the factory floor will remain a challenging environment.