WASHINGTON -- US manufacturing activity picked up in October amid strong domestic demand, keeping inflation at the factory gate elevated.

Despite the unexpected improvement reported by the Institute for Supply Management on Monday, sentiment among manufacturers remained overwhelmingly downbeat, with some complaining that "economic policies coming out of Washington continue to weigh on business conditions," and others saying the situation was "making it impossible to make sound long-term decisions." They were likely referring to rising prices for a range of commodities including energy, stemming from the ongoing US-Israeli war with Iran. A recent escalation in the trade war with Canada was also cited by manufacturers as a constraint.

The inflation fallout from the Middle East conflict has also helped depress consumer sentiment, culminating in broad disapproval of President Donald Trump's stewardship of the economy. Discontent over the rising cost of living is likely to determine control of Congress in this week's midterm elections.

Economists cautioned that rising interest rates and declining inflation-adjusted household income would hamper manufacturing activity next year, especially the segments not exposed to the artificial intelligence spending frenzy.

"While AI-related investment is expected to remain strong, further shifts in AI sentiment, which has worsened in recent weeks, could weigh on investment plans," said Veronica Clark, an economist at Citigroup. "Even if current investment plans proceed, this would still suggest a slowing growth rate of future investment. Additionally, higher rates and recently tighter financial conditions could weigh on non-AI related parts of the manufacturing sector."

The ISM said its manufacturing Purchasing Managers' Index increased to 55.5 last month from 54.5 in September. Economists polled by Reuters had forecast the PMI would stay at 54.5. The PMI has stayed above the 50 threshold this year, indicating growth in manufacturing, a sector that accounts for about 9.4 percent of the economy.

A measure of production at factories jumped 2.3 percentage points to 59 last month, the highest reading since November 2021.

Twelve industries reported growth, including transportation equipment, electrical equipment, appliances and components, machinery, primary metals, textile mills, and computer and electronic products. The three industries reporting a contraction were paper products, printing and related support activities, and nonmetallic mineral products.

Activity is being driven by robust consumer spending and business spending on AI. The government reported last week that domestic demand grew at its fastest pace in more than five years in the third quarter.

The overall economy grew at a 3.4 percent annualized rate last quarter after expanding at a 2.2 percent pace in the April-June period, even as the war in the Middle East stoked inflation. The ISM survey's new orders measure edged up to 55.5 from 55.3 in September, with exports also rising.

Factory inventories also increased. The government's advance GDP report showed that business inventories rebounded last quarter after having been drawn down for five straight quarters.

Still, Susan Spence, who chairs the ISM Manufacturing Business Survey Committee, noted that "general sentiment got worse for a third month in a row." She reported that 66 percent of commentary from respondents was negative, with pricing volatility dominating the downbeat views, followed by longer lead times, tariffs and the war.

Some makers of fabricated metal products said "customers are unwilling to make commitments to anything other than the shortest term due to the vast uncertainty." Their counterparts in the chemical products industry said "negative, inflation, in the red are the three words or phrases that best describe our strategic sourcing for 2026." Some manufacturers of transportation equipment said "customers continue to be in a wait-and-see mode," adding that they "continue to be gobsmacked by the high price of equipment when they ask for quotes." The AI race and construction of data centers are also putting a strain on supply and boosting prices.

"Any commodity consumed by AI/data centers is in a crunch, both for supply and pricing," said some businesses in the miscellaneous manufacturing sector. Machinery manufacturers reported that "explosive growth in the semiconductor and government/defense spaces has put us on our heels as we try to work through demand." The survey's supplier deliveries index inched up to 59.1 from 59.0 in September. A reading above 50 indicates slower deliveries. Suppliers' delivery performance to manufacturing organizations slowed for the 11th straight month.

Among the products that remained in short supply were aluminum, copper, electrical and electronic components, and memory chips. Strained supply chains meant factories continued to pay more for inputs.

The survey's gauge of prices paid for inputs eased to a still-high 75.2 from 77.9 in September, supporting economists' views that inflation will continue to run above the Federal Reserve's 2 percent target into 2027. Prices continued to rise for a number of products, including aluminum, copper, diesel fuel, and electronic and memory components.

The government last week reported that the Personal Consumption Expenditures Price Index rose 3.6 percent year over year in September. It is one of the inflation measures monitored by the US central bank for monetary policy.

The Fed last Wednesday left its benchmark overnight interest rate within the 3.75 percent-4.00 percent range while acknowledging that inflation "remains elevated." Economists expect the US central bank to raise borrowing costs in December.

Factory employment continued to grow last month, though the pace slowed from September. A measure of employment in the sector edged down to 52.4 from 52.7 in September, slightly above economists' forecast of 52.0.

"Persistent supply constraints and elevated input costs suggest the inflationary blaze remains far from contained," said Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets. "The combination of firmer factory activity and still-hot prices is not a good mix for the Fed."