U.S. factory activity grew for the first time in a year in January, with new orders rebounding sharply, but manufacturing is still not out of the woods as import tariffs raised raw material prices and strained supply chains.

The Institute for Supply Management said on Monday its manufacturing PMI rebounded to 52.6 last month.

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"There's an expectation that sometime in the middle quarters of the year we'll see tariff inflation topping out." —​ Federal Reserve Chairman Jerome Powell

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It was the first time in 12 months that the PMI was above 50 and the highest reading since August 2022, indicating growth in manufacturing, which accounts for 10.1% of the economy.

The PMI was at 47.9 in December, and had been in contraction territory for 10 straight months. Economists polled by Reuters had forecast the PMI rising to 48.5.

Last month's improvement could be related to tax legislation, which made bonus depreciation permanent among other perks, coming into effect.

Manufacturing is yet to experience the renaissance President Donald Trump envisioned with his sweeping tariffs. Manufacturing employment dropped by 68,000 jobs in 2025.

Factory production contracted at a 0.7% annualized rate in the fourth quarter, data from the Federal Reserve showed.

But there have been some pockets, mostly in the technology industry, thanks to an artificial intelligence investment boom.

The ISM survey's forward-looking new orders sub-index jumped to 57.1 last month, the highest level since February 2022, from 47.4 in December.

Backlog orders also increased and exports recovered a bit. The surge in new orders, however, meant some stress on supply chains and higher input costs.

The survey's supplier deliveries index increased to 54.4 from 50.8 in the prior month. A reading above 50 indicates slower deliveries.

That could have contributed to the rise in the PMI. A lengthening in suppliers' delivery times is normally associated with a strong economy and high demand, but could also be a sign of supply chain bottlenecks related to tariffs.

The survey's prices paid measure increased to 59.0 from 58.5 in December, in line with forecasts.

That would suggest goods prices still have more room to rise and contribute to keeping inflation above the Federal Reserve's 2% target for some time.

The U.S. central bank last week left its benchmark overnight interest rate in the 3.50%-3.75% range.

Fed Chair Jerome Powell attributed the overshoot in inflation to tariffs, adding "but there's an expectation that sometime in the middle quarters of the year we'll see tariff inflation topping out."

Factory employment contracted further, though the pace of decline slowed. The ISM has noted that companies were laying off workers and not filling open positions "due to uncertain near- to mid-term demand."

The survey's measure of manufacturing employment rose to 48.1 from 44.8 in December.