U.S. Factory Activity Contraction Faster Than Expected: Market Reaction and Analysis

The Institute for Supply Management (ISM) reported on December 1, 2025, that U.S. factory activity contracted at a faster pace than expected in November, marking the ninth consecutive month of contraction [1]. The decline was attributed to higher tariffs impacting businesses, with pullbacks in supplier deliveries, new orders, and employment [1]. Four manufacturing sectors reported growth (Computer & Electronic Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Machinery), while most others contracted [1].

Following the report’s release, U.S. stock markets showed mixed reactions on December 1: the S&P 500 closed up 0.26% at 6,830.17, the NASDAQ Composite rose 0.58% to 23,306.01, and the Dow Jones Industrial Average fell 0.25% to 47,460.04 [0]. The Industrials sector overall recorded a 0.70% gain [0], but the Industrial Select Sector SPDR Fund (XLI), a key ETF tracking the sector, closed flat at $152.53 (down just 0.01%) with open/high/low of $152.54/$153.00/$152.17 and 4.75M in volume [0]. The moderate market reaction may stem from the contraction being a 9-month trend (no new surprise) and the Technology sector’s 0.79% gain offsetting manufacturing concerns [0].

A key discrepancy emerged between PMI surveys: while ISM indicated contraction, S&P Global’s November manufacturing PMI of 52.2 signaled expansion [2]. This divergence likely reflects ISM’s focus on large manufacturing firms versus S&P Global’s broader coverage of small and medium enterprises.

1. Muted Market Reaction Due to Trend Continuity
   : The ninth consecutive month of contraction means the news was largely priced in, limiting negative market impact [0].
2. Tech Sector Strength Offsets Manufacturing Weakness
   : The Technology sector’s outperformance (driving NASDAQ and S&P 500 gains) mitigated concerns from the ISM report [0].
3. PMI Survey Divergence Indicates Manufacturing Segmentation
   : ISM’s contraction for large firms contrasts with S&P Global’s expansion for broader manufacturing, highlighting potential disparities in the sector’s health [2].

• Prolonged Manufacturing Contraction
  : Nine consecutive months of decline may lead to ripple effects on related industries and employment over time [1].
• Tariff Policy Uncertainty
  : The ISM report explicitly linked contraction to higher tariffs, emphasizing ongoing trade policy risks for manufacturers [1].
• Conflicting Economic Signals
  : Discrepant PMI data creates uncertainty about the true state of U.S. manufacturing, complicating market outlook assessments [2].

• Sectors Less Exposed to Manufacturing
  : The Technology sector’s strong performance suggests potential resilience for industries insulated from manufacturing headwinds [0].

• Event
  : ISM reported faster U.S. factory activity contraction in November 2025 (ninth consecutive month) due to tariffs [1].
• Market Performance
  : Mixed reactions (S&P 500 +0.26%, NASDAQ +0.58%, Dow -0.25%); Industrials sector +0.70% but XLI ETF -0.01% [0].
• PMI Data
  : ISM (contraction, exact November number unavailable; October = 48.7 [2]) vs. S&P Global (52.2, expansion [2]).
• Unresolved Questions
  : Exact November ISM PMI, other December 1 macroeconomic data, and reasons for the Industrials sector/XLI ETF performance discrepancy [0].