Key Takeaways
✅ The ISM Manufacturing PMI and S&P Global Manufacturing PMI diverged significantly in October 2025, with ISM showing contraction (48.7%) while S&P PMI indicated expansion (52.5%), reflecting different survey methodologies and company samples.
✅ The divergence reveals a bifurcated manufacturing recovery: domestic-focused companies gaining from strong new orders growth (fastest in 20 months) while traditional heavy manufacturers struggle with tariff impacts, weak exports, and destocking.
✅ Steel prices remain elevated despite manufacturing headwinds, with hot-rolled coil (HRC) steel trading around $847 USD/ton as tariff-induced input costs continue pressuring margins across steel-intensive industries, with primary metal manufacturers facing tariff costs exceeding 12%.
Introduction: Understanding the PMI Puzzle
When supply chain executives, investors, and policymakers review monthly manufacturing data, they often encounter a confusing puzzle: two official surveys of U.S. manufacturing activity released just days apart tell contradictory stories about the health of American factories. In October 2025, this divergence reached a critical juncture. The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) fell to 48.7%, signaling contraction for the eighth consecutive month. Meanwhile, the S&P Global U.S. Manufacturing PMI climbed to 52.5%, suggesting robust expansion and the strongest growth in new orders in 20 months.
How can both surveys be simultaneously correct? Why do manufacturing professionals, economists, and investors put weight on different indices? And most importantly for those tracking commodity markets and industrial production: what does this divergence reveal about the true health of manufacturing, and what are the implications for steel prices and the broader economic outlook?
Understanding these questions has become increasingly critical in 2025. As tariffs reshape supply chains, trade policies create unprecedented uncertainty, and global demand patterns shift, the manufacturing sector stands at a crossroads. This article explores the methodological differences between these two major indices, examines why they are diverging in 2025, and analyzes what their conflicting signals mean for steel price trends, investment strategies, and the manufacturing outlook heading into 2026.
The Two PMI Surveys – Methodology and Structure
What Is the PMI?
The Purchasing Managers’ Index represents one of the most widely tracked early indicators of economic health. It measures perceptions and decisions of purchasing executives at manufacturing companies, capturing sentiment on production, new orders, employment, supply chain timing, and input costs. PMI readings above 50 indicate expansion, while readings below 50 suggest contraction. Despite its simplicity, the PMI serves as a leading indicator of manufacturing output growth, employment trends, and inflation pressures weeks before official government data becomes available.
ISM Manufacturing PMI: The Traditional Survey
The ISM Manufacturing PMI, administered by the Institute for Supply Management, traces its origins to 1931, making it one of the oldest business surveys in the United States. In its current form, the ISM survey contacts approximately 800 purchasing executives across manufacturing companies of varying sizes. However, the survey methodology contains a structural bias: because participation requires ISM membership, respondents skew toward larger, more established companies. This bias affects how different sectors are represented and weighted in the final index.
The ISM’s survey approach targets purchasing professionals specifically, leveraging their frontline knowledge of material costs, supplier behavior, and production demands. The survey covers a broad non-manufacturing component as well, encompassing all economic activity outside of traditional manufacturing, including agriculture, mining, utilities, construction, retail sales, and various other sectors. This breadth in the services definition makes ISM data more sensitive to commodity price movements and less directly comparable to international PMI surveys, which follow narrower service sector definitions.
When calculating the headline Manufacturing PMI, ISM synthesizes five main indices: New Orders (40% weight), Production (30%), Employment (20%), Supplier Deliveries (15%), and Inventories (10%). The organization uses seasonal adjustment methodology that forecasts the coming year’s seasonal factors in advance, meaning current data doesn’t feed into that year’s adjustment calculations—a methodological approach that can create distortions as the calendar year progresses.
S&P Global Manufacturing PMI: The Broader Survey
The S&P Global Manufacturing PMI (formerly known as the Markit PMI or IHS Markit PMI) follows a different structural path. S&P Global’s survey reaches approximately 1,200 U.S. manufacturing companies, providing a substantially larger sample than ISM’s 800 participants. This expanded sample includes firms of all sizes and captures a more representative cross-section of American manufacturing, reducing potential bias toward larger firms.
S&P Global targets a different respondent profile: rather than focusing exclusively on purchasing professionals, the survey reaches purchasing directors, finance executives, and other C-suite decision-makers. This broader stakeholder approach captures a more comprehensive view of business conditions and forward-looking sentiment. The S&P methodology defines the service sector narrowly, encompassing only private sector, fee-paying services consistent with international standards. This consistency makes S&P Global data more comparable across countries and enables deeper international analysis.
The S&P Global survey methodology calculates headline PMI from five weighted components: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%), and Stocks of Purchases (10%). Crucially, S&P Global publishes preliminary “flash” estimates based on approximately 85% of survey data about 12 days before final figures are released. These preliminary estimates, while less complete, provide an early signal that financial markets trade on aggressively. S&P uses X13 seasonal adjustment, recalculating seasonal adjustment factors monthly using the latest data, which many economists argue produces more accurate adjustments.
The October 2025 Divergence – What Happened and Why?
The Numbers Tell Conflicting Stories
In October 2025, the divergence between these surveys reached levels not commonly seen. The ISM Manufacturing PMI registered 48.7%, down from 49.1% in September, extending a contraction streak to eight consecutive months. This reading fell below consensus forecasts of 49.5%, disappointing economists expecting stabilization. Meanwhile, the S&P Global Manufacturing PMI rose to 52.5%, up from 52.0 in September, marking the third consecutive month of expansion and signaling solid manufacturing growth.
At face value, these numbers create cognitive dissonance. One survey suggests American manufacturing remains deeply troubled, contracting faster than expected. The other indicates growing momentum, expanding output, and robust new order demand. For manufacturers making capital allocation decisions, policy makers crafting responses, and investors positioning portfolios, this contradiction poses a genuine interpretive challenge. Which index should drive decision-making? Do they actually contradict each other, or do they tell complementary stories about different segments of the manufacturing sector?
Why the ISM Index Fell: The Contraction Details
The ISM’s October decline reflects significant weakness in multiple dimensions of manufacturing activity. The Production Index fell sharply to 48.2%, down 2.8 percentage points from September’s 51%, indicating factories pulled back on output despite having orders to work through. The New Orders Index, while improving slightly to 49.4% from 48.9%, remained firmly in contraction, with demand clearly subdued. Most concerning, the Employment Index came in at 46%, remaining deeply depressed despite a modest 0.7 percentage point increase. The data revealed that 67% of ISM survey respondents reported managing headcount reductions, the norm across the sector rather than the exception.
The ISM’s Inventories Index plunged to 45.8%, down 1.9 percentage points from 47.7%, reflecting rapid inventory liquidation as manufacturers struggled to match production to demand. The Backlog of Orders Index rose to 47.9%, up 1.7 percentage points, but remained in contraction, suggesting limited pent-up demand to drive future growth. Most notably, the Supplier Deliveries Index indicated slower delivery performance for the third consecutive month (54.2%), a pattern that, while indicating supply chain stress, also represents a nuance: slower deliveries are counterintuitive to the PMI calculation. The ISM inverses this index, treating slower deliveries as a positive signal (assuming they reflect strong demand pulling suppliers to capacity). However, when coupled with weak orders and production, slower delivery times may instead reflect tariff-induced supply disruptions and logistics challenges rather than demand-driven capacity constraints.
Why the S&P Global Index Rose: The Expansion Details
The S&P Global index tells a different story. The October PMI of 52.5% reflected strength in multiple areas. Output growth accelerated, and new orders surged to their highest level in 20 months, driven by improved market demand and business success in securing new contracts. This timing matters: while the ISM survey focused on historical purchasing manager sentiment regarding past month orders, the S&P survey captured an exceptional month for new business acquisition. According to S&P Global’s analysis, firms reported “faster output growth and the strongest rise in new orders in 20 months, driven by improved market demand and success in securing new contracts.”
However, lifting the hood revealed important qualifications. Exports fell for the fourth consecutive month and at the sharpest pace since July 2025, reflecting tariff damage to international competitiveness. Employment growth remained modest, with S&P noting that “employment growth eased to a three-month low, while input inventories increased only marginally.” Critically, S&P Global reported that firms possessed “spare capacity” in production facilities, explaining the muted hiring response despite rising orders. On the price front, input cost inflation “stayed elevated by historical standards due to tariffs, prompting firms to raise selling prices significantly.”
The most revealing detail: business confidence weakened to its lowest level since April 2025 as “firms expressed caution over global trade conditions and policy uncertainty.” Companies were ordering more domestically, but doing so with reduced confidence in the sustainability of that demand.
The Bifurcation Explained: Domestic vs. Export-Oriented Manufacturing
The PMI divergence reflects a crucial fracture in American manufacturing. Research and analysis of the survey compositions reveal that the S&P Global PMI captures a broader base of companies, including consumer goods producers and technology-linked manufacturers positioned to benefit from domestic demand and U.S. technology infrastructure investments (particularly AI and data center buildouts). These firms are ordering more and investing in domestic production.
The ISM index, in contrast, reflects the traditional industrial core: capital goods producers, chemical manufacturers, and heavy equipment makers still wrestling with destocking cycles, tariff uncertainty, and weak export markets. This explains the divergence: when analyzed segment-by-segment, ISM’s October report noted that “just six of the eighteen major manufacturing categories reported growth in October, while twelve reported contraction.” The winners (food, beverage, and transportation equipment) represent a small slice of the manufacturing base. The losers include machinery, electrical equipment, electronics, chemicals, fabricated metals, and other traditional industrial sectors that drive commodity demand, including steel.
Deconstructing Manufacturing PMI Differences – Sample Size, Methodology, and Coverage
Sample Size and Composition Effects
The difference in survey size between ISM (800 companies) and S&P Global (1,200 companies) matters significantly. Larger sample sizes generally provide more stable readings and better representation of diverse manufacturing segments. S&P Global’s broader sample allows it to capture trends in smaller manufacturing firms and emerging sectors that ISM’s membership-weighted sample may underrepresent. For steel prices specifically, this difference becomes important: S&P Global captures aerospace and high-value-added manufacturers who may benefit from policy support and domestic investment, while ISM’s sample might overweight traditional heavy steel-consuming sectors like autos and construction machinery that face greater headwinds.
However, sample size alone doesn’t explain the divergence. Both surveys saw similar directional movements in employment and new orders indices. The divergence comes more from sector composition: S&P Global’s sample appears to include higher concentrations of consumer goods, technology, and domestically-focused firms, while ISM’s captures proportionally more capital-intensive, globally-exposed manufacturers.
Seasonal Adjustment Methodology
ISM’s seasonal adjustment methodology—forecasting the full year’s factors in advance and not revising them based on current data—creates the potential for distortions. When weather patterns, labor patterns, or operational schedules deviate from historical norms, the fixed seasonal factors can misrepresent underlying trends. S&P Global’s approach, recalculating seasonal factors monthly using current data, adapts more readily to real-time economic conditions. In a period of significant structural economic change (tariffs, supply chain reorganization, policy uncertainty), S&P’s adaptive methodology may track actual turning points in economic activity more accurately.
Services Sector Definition Impact
The ISM’s broad definition of services (encompassing agriculture, mining, construction, utilities, and government-adjacent activities) creates different sensitivities than S&P Global’s narrow private-services focus. When commodity prices spike due to tariffs or geopolitical shocks, ISM’s services PMI becomes contaminated by commodity price effects. An agricultural procurement manager responding to higher input costs from tariffs will report inflation pressures even if underlying production and orders remain weak. This can distort the overall ISM reading in ways that don’t accurately reflect true manufacturing and service sector economic activity.
For those tracking steel prices and manufacturing outlook, the ISM’s broad services PMI has become particularly problematic in the current tariff environment. Mining and primary metal sectors (which dominate tariff exposure costs—exceeding 12% of input costs) are captured in the ISM services survey. These sectors experience acute input cost pressures from tariffs but don’t represent true services sector weakness. S&P Global’s exclusion of these commodity-adjacent sectors from its services index creates cleaner manufacturing signals.
Steel Prices in October 2025 – The Impact of Divergent PMI Signals
Current Steel Price Environment
As of early November 2025, hot-rolled coil (HRC) steel—the benchmark price used throughout the U.S. steel market—trades around $847 USD per ton, with price momentum volatile amid conflicting manufacturing signals. Over the past month, HRC prices rose approximately 5.75%, and the contract price for December 2025 futures stands at $885 USD/ton, suggesting market participants expect some seasonal strength but remain cautious about longer-term demand.
Comparing year-over-year, HRC steel prices are up 20.66% compared to November 2024, a significant increase driven primarily by tariff pressures rather than demand-side strength. This price elevation persists despite manufacturing sector weakness, an unusual and important market dynamic. Normally, if manufacturing contracted for eight consecutive months (as ISM suggests), downward pressure on steel prices would intensify as demand destruction accelerated. Instead, prices remain elevated. The explanation lies in supply-side dynamics and tariff-induced costs: the 50% steel tariffs imposed in June 2025, combined with stacking of reciprocal tariffs on derivative steel products, have created a price floor beneath domestic steel that prevents normal deflationary pressure from materializing.
Tariff Effects on Steel Pricing
The tariff regime in place since March and expanded dramatically in June 2025 has fundamentally altered steel market dynamics. The 50% tariff rate on steel imports (versus 25% for UK-origin goods) creates a price umbrella over domestic steel producers. Imported steel must clear U.S. tariffs before entering the market, so even if overseas mills produce steel cheaper, they cannot compete domestically once tariffs are imposed. This protection allows U.S. mills to maintain prices at levels that would be unsustainable in a free-trading environment.
However, this tariff protection applies asymmetrically across the supply chain. While steel producers benefit from elevated prices, downstream manufacturers—those consuming steel as an input—face margin compression. BCG’s analysis of the 50% tariff regime estimated an additional $50 billion in tariff costs across the economy, doubling the estimated impact from earlier 25% duties. Specifically, the primary metals manufacturing sector (smelting and refining metals including steel) faces tariff costs exceeding 12% of total input costs. Fabricated metals manufacturers, machinery producers, and transportation equipment manufacturers—industries heavily represented in the ISM survey—face significant tariff-related input cost increases.
The price dynamics tell the divergence story. Steel mills and domestic producers report stronger new order activity (captured in the S&P PMI’s 20-month high) driven by companies scrambling to ensure supply before tariffs escalate further and to lock in domestic capacity. This creates a temporary demand surge. Simultaneously, downstream manufacturers facing margin compression due to tariff-inflated input costs pull back on orders and reduce production (captured in the ISM contraction), rationally conserving cash and delaying capital investments until tariff uncertainty resolves.
The Supplier Delivery Index Distortion
An important detail affects both PMI readings: the Supplier Deliveries Index behaves counterintuitively during certain market conditions. ISM reported slower delivery performance for the third consecutive month (54.2%), which the index treats as positive. Historically, slower deliveries signal strong demand overwhelming supplier capacity—a classic sellers’ market. However, in the current environment, longer supplier delivery times reflect tariff-induced supply disruptions and logistics bottlenecks rather than demand-driven capacity constraints.
Manufacturing executives responding to the surveys face a nuanced situation: their suppliers are taking longer to deliver materials, partly because tariff uncertainty has disrupted normal supply chain flows. Some suppliers are stuck at ports awaiting tariff classifications. Others are experiencing production delays as they adapt to new tariff-imposed costs. Some international suppliers are delaying shipments as they negotiate pricing to pass through tariff costs. These delays inflate the Supplier Deliveries Index upward (remember, slower delivery times are inverse-scored to suggest positive conditions), yet the underlying cause—tariff disruption—creates actual operational challenges that suppress production and hiring.
The S&P Global approach, with its broader sample of firms less dependent on international supply chains, may not experience these delays as acutely, potentially explaining part of the PMI divergence.
Manufacturing Sector Breakdown – Which Industries Drive PMI Differences?
Winners and Losers in the Bifurcated Recovery
The October ISM survey explicitly identified which industries expanded versus contracted: “Of the six largest manufacturing industries, only two (Food, Beverage & Tobacco Products; and Transportation Equipment) registered growth in October.” Transportation equipment specifically noted growth, driven in part by domestic automotive investment as companies respond to tariff concerns and nearshoring opportunities. The five major industries reporting contraction—machinery, electrical equipment, electronics, chemicals, and fabricated metals—represent the traditional backbone of U.S. manufacturing export competitiveness.
This sectoral split directly explains the PMI divergence. Food, beverage, and consumer staples manufacturers benefit from strong domestic demand and face less tariff exposure than machinery and equipment manufacturers. Transportation equipment firms receive policy support through various manufacturing incentive programs. These sectors expanded strongly in October, contributing to the S&P Global index strength.
Conversely, the twelve industries reporting contraction (of eighteen tracked by ISM) represent a broader swath of the manufacturing base, particularly those exposed to tariffs and international trade. Machinery manufacturers that depend on imported components face tariff cascades. Electrical equipment and electronics producers source components globally, facing multiple tariff layers. Fabricated metals manufacturers, working with tariff-elevated steel inputs, see margin compression. These industries dominate the ISM sample by historical participation, weighted more heavily than in the S&P survey.
Steel Consumption Patterns Across Industries
Steel prices face particular pressure from the mix of industries contracting versus expanding. The contracting sectors—machinery, electrical equipment, and fabricated metals—represent heavy steel consumers. A machine tool manufacturer building a new machine will consume thousands of pounds of steel. An electrical equipment maker building transformers requires substantial steel inputs. Fabricated metals producers (sheet metal contractors, structural steel fabricators, etc.) essentially convert steel into value-added products.
Transportation equipment, while showing expansion in October, includes significant competition between domestic and imported content. Automotive manufacturers face pressure to source domestically (increasing steel consumption) but also face tariff-related cost pressures that limit new vehicle production. The net effect on steel demand from transportation equipment growth likely remains constrained.
In contrast, the food, beverage, and tobacco category expanding in October involves much lighter steel consumption per unit of production. Food processing equipment and packaging machinery use far less steel than capital equipment. This sectoral rebalancing—away from heavy steel-consuming sectors and toward lighter industries—creates headwinds for steel demand even as certain industries report growth.
The implications for steel prices become clear: despite the S&P PMI showing expansion, the types of industries expanding consume less steel, while the industries contracting consume more. This partially explains why steel prices remain elevated but demand pressures persist. The tariff-driven price floor prevents downside movement, while the sectoral composition of expanding industries limits upside demand growth.
Export Performance and Global Trade Dynamics
The Export Collapse: A Key Divergence Driver
One of the most revealing differences between the PMI indices relates to export performance. The S&P Global PMI explicitly noted that “exports fell for the fourth straight month and at the sharpest pace since July, reflecting weaker sales to key trading partners, including Canada, China, Europe, and Mexico.” The ISM’s New Export Orders Index registered 44.5%, indicating significant contraction in export demand. This represents a critical finding: while domestic demand showed surprising strength (particularly in the S&P survey), international demand collapsed as trading partners responded to U.S. tariffs with their own countermeasures and as weakening global growth reduced demand.
The tariff regime has triggered retaliatory responses from major trading partners. Canada, Mexico, China, and European partners have implemented or threatened tariff increases on U.S. exports, particularly targeting agricultural products, machinery, and equipment where the U.S. maintains export strengths. These retaliatory tariffs create price disadvantages for U.S. exporters competing internationally, pricing them out of foreign markets. At the same time, global manufacturing activity has shown weakness, with European manufacturing PMI in contraction and Asian demand softening.
Steel trade exemplifies this dynamic. U.S. steel mills benefit from the 50% import tariff protecting domestic markets from foreign competition. However, they face equal and opposite headwinds in export markets: their steel becomes too expensive to sell internationally when competing against tariff-free or lower-tariff competition from other origins. The export data suggests U.S. manufacturers are consciously shifting production away from export markets toward domestic markets where they maintain tariff protection and face less competitive pressure.
Global Manufacturing Weakness
The global context matters. European manufacturing contracted for its 23rd consecutive month in recent periods, with Eurozone Manufacturing PMI stuck below 50 throughout 2024 and into 2025. Japanese manufacturing has returned to contraction with currency and cost pressures mounting. China’s manufacturing, while showing some sectoral strength, faces overcapacity problems despite government efforts at capacity rationalization. India represents the bright spot, with Manufacturing PMI hitting 59.2 (a 17.5-year high), but India’s manufacturing base remains substantially smaller than U.S., European, or Chinese counterparts.
This global contraction context explains why even as U.S. domestic demand shows relative strength, overall manufacturing activity remains constrained. Companies worldwide are reducing international procurement (pressuring U.S. exporters and global steel demand), and supply chains are reorganizing away from extended global trade networks. U.S. manufacturers focusing on domestic markets experience relative strength, but this doesn’t support broad-based manufacturing growth or sustained steel demand expansion.
Employment Trends and Labor Market Signals
Weak Hiring Despite Mixed Signals
Both PMI surveys recorded weak employment growth in October 2025, despite divergent overall signals. The ISM Employment Index came in at 46%, remaining firmly in contraction territory, while the S&P Global survey noted “employment growth remained modest, with firms citing spare capacity in production facilities.” This consistency across both surveys—weak hiring despite some order growth—reveals important information about business confidence and expected sustainability of demand improvements.
When companies experience improved orders but maintain spare production capacity and avoid hiring, they signal skepticism about the durability of the demand uptick. Spare capacity indicates that existing equipment and workforce can handle expanded production without requiring new investment or hiring. Companies protecting workforce size suggests they fear returning to contraction once tariff uncertainty resolves or global demand materializes. This defensive posture—taking orders but not hiring, expanding output using existing capacity—pervades modern manufacturing and explains why employment remains severely depressed despite some optimistic signals elsewhere.
The ISM explicitly found that “67% of panelists indicated that managing head count is still the norm at their companies, as opposed to hiring.” This statistic reveals the psychology of the manufacturing sector: the vast majority of firms remain in cost-cutting and workforce reduction mode even as some sections of the market show strength. This employment weakness has profound implications for the broader economy. Manufacturing employment has stalled at roughly 13 million workers, well below pre-pandemic levels, and the data suggests no meaningful hiring recovery lies immediately ahead.
Implications for Consumer Spending and Steel Demand
Manufacturing employment weakness limits spillover effects to broader economic strength. With manufacturing companies avoiding hiring despite some order growth, the income gains from manufacturing activity don’t materialize. Wages in manufacturing remain under pressure as workers fear layoffs and competition for jobs intensifies. This dampens consumption growth from manufacturing workers and limits the demand multiplier effects that would normally amplify manufacturing expansion into broader economic growth.
For steel specifically, this employment weakness signals that manufacturing capital investment will remain muted. Companies hiring aggressively would typically invest in new equipment and capacity, driving steel demand for structural steel, machinery components, and equipment. Companies managing headcount reductions and running existing capacity harder drive less new investment, limiting structural steel and equipment demand.
Input Costs, Inflation Pressures, and Price Management
Tariff-Driven Input Cost Inflation Remains Elevated
Both PMI surveys captured elevated input cost pressures, though with slightly different magnitudes. The ISM Prices Paid Index came in at 58%, down 3.9 percentage points from September’s 61.9% but remaining well above the 50 contraction threshold, indicating sustained input price increases. The S&P Global survey noted that “input cost inflation stayed elevated by historical standards due to tariffs, prompting firms to raise selling prices significantly.” This suggests that pricing power—the ability to pass costs through to customers—remains reasonably strong for firms with leverage, but deteriorating for those without.
The tariff regime’s three-layer structure creates cascading cost pressures:
Layer 1: Steel Tariffs (50%)
Direct 50% tariffs on imported steel imports create an immediate price floor for domestic steel and make imported steel economically noncompetitive in most applications.
Layer 2: Derivative Product Tariffs (50%)
Steel articles and derivative products (fabricated steel components, machinery with steel content, etc.) face 50% tariffs on the steel content, plus additional reciprocal tariffs on non-steel components. A fabricated bracket using imported steel faces tariffs on both the raw steel component and the fabrication labor/value-added component.
Layer 3: Reciprocal Tariffs (Variable)
Non-steel goods from countries subject to reciprocal tariffs face additional 15-25% duties depending on the origin country. This means a piece of imported industrial equipment faces tariffs on any steel components plus reciprocal tariffs on the overall product.
These stacking tariffs create unprecedented cost pressures on importing manufacturers. Yale’s Budget Lab estimated that primary metal manufacturers face tariff costs exceeding 12% of total input costs. Manufactured goods industries dependent on imported steel-containing components face cascading cost increases with limited ability to pass costs through, particularly as export markets become inaccessible.
Pricing Power Divergence
A critical distinction emerges: firms with strong domestic demand (captured more heavily in S&P PMI sample) report success raising selling prices to compensate for tariff-driven input costs. Firms focused on export markets or competing against imports (captured more heavily in ISM sample) find pricing power absent, as customers face imported alternatives and customers’ own cost pressures limit willingness to accept price increases. This explains part of the employment divergence: companies raising prices face constant volume demand (orders up but hiring limited due to productivity improvements from price-driven volume), while companies unable to raise prices see orders fall and employment pressures intensify.
For steel, this creates a paradoxical situation: prices remain elevated despite weak demand fundamentals, because the tariff-imposed price floor and domestic mill pricing power override normal market forces. However, this price elevation incentivizes substitution (companies exploring aluminum or composite alternatives), encouraging import competition (companies planning sourcing from tariff-exempt countries), and delaying purchasing (companies stretching inventory turnover rather than committing to high-priced purchases).
The Divergence Outlook – What Comes Next?
Historical Patterns of PMI Divergence
Research examining historical ISM and S&P Global PMI divergences reveals important patterns. ABN AMRO’s analysis of divergences noted: “Although they tend to track one another very closely, it is actually not that unusual for the two indices to diverge significantly in a given month. It is highly likely therefore that this divergence will close again in the coming months.”
The divergences occur most frequently during periods of rapid economic change or structural shifts in the economy. Post-pandemic, divergences became more common as supply chains reorganized, labor markets tightened and then loosened, and fiscal policy shifted dramatically. The current tariff-driven divergence follows this pattern: a structural change in the trading regime creates temporary asymmetric impacts on different firm types, producing divergent index readings. Historical evidence suggests these divergences eventually close as the index-lagging firms catch up to new realities and adjust expectations.
Forward-Looking Signals
Several leading indicators suggest which direction the divergence might resolve. First, business confidence weakened to its lowest level since April 2025 according to S&P Global, despite that survey’s generally more optimistic tone. This weakening suggests that even firms seeing order growth remain pessimistic about sustainability. Second, the export collapse (fourth consecutive month of decline for S&P, contraction for ISM) indicates that global headwinds will eventually dampen domestic demand as trading partner recessions deepens. Third, inventory accumulation signals (S&P reporting “record buildup of unsold inventories”) suggest that the surge in new orders reflects customers front-loading purchases ahead of tariff uncertainty rather than genuine demand recovery.
These signals point toward ISM potentially proving more prescient about the underlying trend: manufacturing activity faces fundamental headwinds from tariffs, weak global demand, and reduced business confidence that will eventually override temporary domestic demand strength. The divergence might resolve as S&P PMI falls back toward ISM levels rather than ISM rising to meet S&P strength.
Tariff Impact Timeline
The tariff regime evolved in distinct phases:
- March 2025: Initial 25% steel and aluminum tariffs imposed
- June 4, 2025: Steel tariffs doubled to 50%, aluminum to 50%
- August 2025: Derivative product tariffs expanded to additional goods
- October 2025: Retaliatory tariffs from trading partners implemented
As these tariffs have time to work through supply chains and expectations stabilize, manufacturing behavior will adjust. Companies in the “ordering surge” phase (front-loading to beat tariffs) will return to normal ordering once tariff levels stabilize. Firms investing in tariff-workaround supply chains (nearshoring, substitution materials) will complete adjustments, reducing emergency ordering. At that point, underlying demand weakness (global recession, high interest rates, weak housing) will dominate the manufacturing outlook.
Steel Price Implications and Near-Term Outlook
Price Forecast Based on PMI Divergence
Current consensus expectations suggest hot-rolled coil steel prices trading near $847 USD/ton (as of early November 2025) may prove difficult to sustain if the manufacturing divergence resolves toward weakness. The price floor created by tariffs provides support, preventing prices from falling below levels where domestic mills remain profitable given their cost structures. However, upside appears limited absent genuine demand acceleration.
CME Group’s HRC Steel futures contracts show December 2025 futures at approximately $885 USD/ton and January 2026 futures at $897 USD/ton, suggesting modest seasonal strength expectations but limited calendar spreads. These prices reflect expectations of relatively stable conditions, not optimism about accelerating demand or contraction about demand destruction.
Looking into 2026, several scenarios emerge:
Scenario 1: PMI Divergence Resolves Downward (Probability: 40%)
ISM proves correct as the better leading indicator. Global manufacturing weakness intensifies, trading partner recessions reduce U.S. export opportunities, and the domestic demand surge proves temporary. Steel prices fall toward $650-$700 USD/ton as global overcapacity pressures increase and tariff-driven pricing power deteriorates. The tariff floor prevents free-fall, but excess capacity in the system ensures downward pressure.
Scenario 2: PMI Stabilizes with S&P Advantage (Probability: 35%)
The divergence persists as the economy bifurcates: domestic-focused industries benefit from U.S. manufacturing investment, AI infrastructure buildout, and policy support, while export-oriented and traditional manufacturing faces pressure. Steel prices stabilize in the $800-$850 range as domestic mill profits remain healthy due to tariff protection, but international demand weakness limits upside. This represents a “muddle through” outcome where different sectors experience different realities.
Scenario 3: Tariff Policy Reversal (Probability: 15%)
Trade negotiations result in tariff reductions or elimination, particularly if international pressure mounts or court challenges succeed in blocking tariffs. Steel prices would fall sharply toward international levels (potentially $550-$600 USD/ton) as trade normalizes and import competition resurges. This scenario appears less likely given current political dynamics but remains possible if trade deficits deteriorate further or international negotiations produce breakthroughs.
Scenario 4: Tariffs Escalate Further (Probability: 10%)
Additional tariff increases are imposed on steel or new tariff actions target steel-consuming industries. Prices would spike temporarily as supply uncertainty intensifies, but underlying demand weakness would eventually overwhelm pricing power. Short-term spikes to $900-$950 USD/ton followed by eventual weakness to $700-$750 range.
Demand Drivers for Steel Looking Forward
Steel demand in 2026 depends on several critical factors:
Manufacturing Capital Investment: Companies making real investment in new capacity (not just running existing capacity harder) require structural steel, machinery components, and equipment fabrication. Current hiring weakness suggests real capacity investment remains constrained. Unless hiring and capital spending accelerate meaningfully, demand remains depressed.
Construction Activity: Construction represents the largest steel-consuming sector after automotive. Housing starts, infrastructure spending, and commercial real estate investment drive structural steel demand. Higher mortgage rates and limited inventory of commercial real estate development opportunity constrain near-term construction activity. Federal infrastructure spending provides some offset, but timing of project deployment remains uncertain.
Automotive Production: Automotive represents the second-largest steel-consuming sector. Vehicle production faces headwinds from high interest rates (limiting car buyers), tariff-elevated input costs, and trade uncertainty. Transportation equipment expansion shown in ISM October data may prove temporary if tariffs discourage vehicle purchases or force price increases that dampen demand.
Inventory Demand: Companies maintain minimum inventory levels of key materials like steel. When economic uncertainty peaks, they defer inventory purchases to conserve cash. When uncertainty resolves, they rebuild inventory. Currently, steel using sectors show inventory caution despite being able to purchase. If tariff uncertainty resolves positively (tariff elimination or significant reduction), inventory rebuilding could provide temporary demand spike.
Conclusion – Navigating Divergent Signals in Manufacturing
The divergence between the ISM Manufacturing PMI and S&P Global Manufacturing PMI in October 2025 reveals more than statistical discrepancy or methodological difference. It exposes the fundamental fracture in American manufacturing as tariffs and policy changes create asymmetric impacts across industries and company types. Domestic-focused manufacturers capturing strong new order demand from business and consumer spending represent one reality. Export-oriented and traditional heavy manufacturers facing tariff-elevated costs, weak global demand, and rising uncertainty represent another. The truth of American manufacturing in late 2025 encompasses both realities.
For steel prices specifically, the divergence has profound implications. Tariffs have created an artificial price floor that prevents normal market-clearing adjustments. Steel prices remain elevated despite weak underlying demand conditions, supported by tariff protection and domestic mill pricing power. However, this elevated price level creates incentives for substitution, international sourcing workarounds, and demand destruction that will eventually overcome the tariff floor. The question is timing: do these demand-side pressures manifest quickly (suggesting prices fall in 2026) or slowly (suggesting prices remain elevated but stagnant)?
The employment data across both PMI surveys provides a critical reality check. Manufacturing companies seeing order growth but avoiding hiring suggest deep skepticism about demand sustainability. This defensive positioning—extracting maximum output from existing capacity without investment or hiring—indicates business leaders don’t believe the current expansion will persist or broaden. When manufacturing leadership lacks confidence to hire, broader economic recovery becomes unlikely, regardless of what any single economic indicator suggests.
Looking forward, three key developments deserve monitoring:
First: Global Manufacturing Indicators
Watch whether European, Japanese, and Chinese manufacturing exit contraction or deepen weakness. Global manufacturing recovery would validate the S&P PMI’s optimism. Deepening global contraction would vindicate the ISM’s pessimism and ensure export markets remain weak indefinitely.
Second: Trade Policy Evolution
Monitor whether tariffs remain at current 50% levels, increase further, or begin facing reversal through trade negotiations. Tariff policy changes would immediately reset steel price dynamics. Stable high tariffs would likely result in eventual price softening as import substitution solutions develop. Tariff increases would create short-term spikes followed by medium-term weakness. Tariff reduction would trigger immediate price pressures toward lower levels.
Third: Manufacturing Hiring and Investment
Track monthly employment data for manufacturing and watch business investment intentions. Genuine economic improvement should eventually manifest in hiring. If months pass and employment remains flat despite ongoing PMI optimism, the divergence suggests the optimism lacks real economic foundation and will eventually resolve downward.
For practitioners, investors, and manufacturers themselves, the divergence resolution likely determines whether 2026 brings manufacturing recovery or deepening contraction. Until that resolution becomes clear, positioning in steel and manufacturing-linked commodities requires acknowledging the genuine uncertainty. Prices have no underlying consensus guide; they’ll reflect flows and speculative positioning until real clarity emerges. Companies planning steel purchases should consider hedging strategies rather than making large commitments at current prices, as downside remains real if the ISM’s pessimism proves prescient, but upside is limited if domestic demand weakens as leading indicators suggest. The PMI divergence invites caution and flexibility rather than conviction in any single direction.
Disclaimer
The content provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. Readers should seek consultation with qualified professionals before making any financial, investment, or legal decisions. We disclaim any liability for losses, damages, or adverse outcomes resulting from decisions made based on the information presented herein.
SOURCES
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