The November 2025 ISM® Manufacturing PMI® Report delivered a Manufacturing PMI® of 48.2%. This level below 50 signifies contraction in manufacturing. The Manufacturing PMI® is in its 9th straight month in contraction and 35th month of contraction in the past 37 months. January and February of this year were the only two months of growth over this timespan. Fortunately, manufacturing is not weak enough to drag the entire economy into contraction. According to ISM, a Manufacturing PMI® above 42.3% “over a period of time” is consistent with an expanding economy. In fact, “the past relationship between the Manufacturing PMI^® and the overall economy indicates that the November reading corresponds to a 1.7% increase in real gross domestic product (GDP) on an annualized basis”.

Unfortunately, the ongoing contraction in manufacturing has not cooled off inflationary pressures. Currently, higher steel and aluminum prices have cascaded through the manufacturing value chain. Tariffs on imported goods have created additional cost burdens. The ISM^® Prices Index increased month-over-month from 58.0% to 58.5%. The Prices Index is also up 6 percentage points year-over-year and has increased for 14 straight months. 

Perhaps tellingly, Computer & Electronic Products was one of four industries that grew in November. I assume the rush to implement AI across enterprises and government is providing this push. For example, Dell Technologies (DELL) reported exceptionally strong demand for AI servers. From the transcript of the recent Q3 2026 earnings call: “AI server demand remained exceptionally strong. We booked $12.3 billion in orders in the quarter, bringing year-to-date orders to $30 billion, both record figures. The large-scale customer base continues to broaden with expansion across neo-cloud or Tier 2 CSPs and sovereigns”.

With manufacturing locked in contraction and services still carrying economic growth, the divide between these two sides of the economy has become central to understanding today’s stagflationary pressures. Input costs continue to rise even as new technologies reshape demand patterns. The expanding adoption of AI could influence productivity and cost structures in unexpected ways. How these pressures resolve in 2026 will be essential to tracking whether stagflation persists, begins to unwind, or takes on a new form altogether.

Full disclosure: long DELL

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The current and projected jumps in labor costs are dramatic:

“…wage income for urban households rose 13% year-on-year in the first half, and average monthly income for migrant workers rose 14.9%, according to data from China’s National Bureau of Statistics. A labor ministry survey of 91 cities in the first quarter showed demand for workers outstripping supply by a record amount, pointing to low unemployment…

…At current rates, China’s private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017, eroding competitiveness and denting the exports that have played a key part in China’s early growth.”

These wage hikes are coming off low levels. For example, as of February of this year, Hon Hai Precision Industry Co, the company that manufactures Apple (AAPL) iPads, reported a 10% increase in base salary for its factory workers to 2,200 yuan ($345) per month.

Moreover, the supply of new, young workers will decrease thanks to China’s one-child policy:

“In 2005, there were 120.7 million Chinese people aged 15-19, according to United Nations estimates. By 2010, that had fallen to 105.3 million, and by 2015 it is expected to dip to 94.9 million.”

Finally the government is forcing the minimum wage and benefits higher:

“China is committed to sharply raising minimum wages, which puts pressure on employers to raise salaries for higher skilled workers. Beijing also has increased requirements for severance payments, which discourages layoffs unless business drops severely.”

It will be interesting to watch what happens to China’s economy as its manufacturing competitiveness declines slowly but surely with the increase in wages.

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“We do, however, expect a positive margin impact of a more stable pricing environment to be offset by the following factors: the costs of many upstream materials, especially rare earth elements, which have increased significantly. These costs are expected to adversely impact gross margins by at least 200 basis points…”

Seagate has been unable to offset these costs, but over the long-term believes there are no supply problems:

“In regards to the increasing cost of upstream materials, Seagate has historically been able to absorb these cost increases and insulate our customers. However, the recent dramatic increase in the cost of rare earth elements, combined with a pre-existing upward trend for a broad base of other commodities, far exceeds our ability to find offsetting cost reductions. While we are exploring opportunities to reduce the content of certain rare earth elements that are used in the manufacture of hard disk drive components, we will be discussing with our customers, passing through what we hope are temporary surcharges related to upstream earth-based commodities. It’s important to note that for the relevant rare earth materials, there does not appear to be a significant supply constraint. And while we have a short-term concern over margin impact, we do not currently have a long-term concern.”

During the Q&A session, Seagate management explained that rare earths are about 2% of the cost of a hard drive due to usage of rare earths in the the VCM magnet and the motor. Management also indicated there remains high uncertainty as to whether the company can pass on the higher costs of rare earths to customers although Seagate does not need to wait for demand of its drives to surpass supply in order to raise these prices.

Seagate appears very optimistic that no real supply issue exists with rare earths. Management is particularly optimistic that U.S. mines alone (presumable Molycorp?) will solve the problem and bring prices down. They even went so far as to call current prices a “bubble”:

“…it doesn’t appear that there’s a true supply constraint here. There’s a lot of dynamics around owners of rare earth materials and processors of rare earth materials and who is controlling inventories at what level, as opposed to there’s fundamentally some shortage. If there was fundamentally a shortage, then I would think that the fact that price is supposedly representing supply and demand. If you effectively reduce supply or enormously increase demand, that would mean that there’s a sustained increase in price. I think this feels a little bit like a bubble…So I think our point is that right now, since it doesn’t feel like there’s a fundamental supply issue, that it probably works itself out. And by the way, if these prices stay high, guess what, there’s a bunch of U.S.-based mines that are going to come online again, and it will solve itself. It’s not like the stuff doesn’t exist. It’s just that a lot of mines were closed down when the prices fell below $75, whatever the magic price is, and we’re well above that right now. So I don’t think it’s a long-term issue.”

Management compared the price run in rare earths to a run they experienced with ruthenium in 2006 that lasted for 2006. I do not know about the dynamics of that market. I will need to research more closely what happened in 2006 to understand the specific similarities to today’s rare earth market. Stay tuned…

Disclosure: Author is net long Molycorp (MCP)

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The troubles at PHG confirm the poor performance retailers like Best Buy (BBY) saw in televisions. From BBY’s last earnings report (March 24, 2011):

“The Domestic segment experienced a low double-digit decline in entertainment hardware and software, as well as TVs, as current consumer demand in new television technologies had not yet emerged as a significant revenue driver…”

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