* Manufacturing PMI rises to 55.6 in July from 53.3 in June

* New orders index climbs to 56.7 while factory employment

measure rebounds to 52.8

* Supplier deliveries slow, prices paid gauge remains

elevated at 71.1

By Lucia Mutikani

WASHINGTON, Aug 3 (Reuters) - U.S. manufacturing activity

increased to the highest level in more than four years in July

amid strong order growth, boosting factory employment, though

the conflict in the Middle East is straining supply chains and

keeping input costs elevated.

Responses in the Institute for Supply Management survey

published on Monday were, however, overwhelmingly negative, with

the U.S.-Israeli war with Iran dominating comments. Price

volatility was also a common theme among respondents, leaving

some economists confident that the Federal Reserve would raise

interest rates as soon as next month.

Still, the improvement in activity, especially the return to

growth in manufacturing employment for the first time in 33

months, was cheered by economists.

"What we hear from purchasing managers is that the cost of

everything coming in the door has gone up since oil prices

jumped in early March," said Carl Weinberg, chief economist at

High Frequency Economics. "Manufacturing companies will pass

through those increased transportation costs as quickly as they

can, just as truckers have already passed their higher costs

through to manufacturers. The Fed will pay attention to this."

The ISM said its manufacturing PMI increased to 55.6 last

month, the highest reading since May 2022, from 53.3 in June.

Economists polled by Reuters had forecast the PMI would edge up

to 54.0. The PMI this year has held above the 50 threshold,

which indicates growth in the manufacturing sector.

Manufacturing, which accounts for about 9.4% of the economy, has

been supported by businesses front-loading orders to avoid

higher prices and shortages stemming from the war. An artificial

intelligence buildout is also driving activity in the technology

sector, blunting the hit on manufacturing from import tariffs.

With business inventories at very low levels, there is ample

room for manufacturing to expand. The Fed reported last month

that factory production grew at its fastest pace in four years

in the second quarter.

Business inventories have declined for five straight quarters,

the government reported last week.

Fifteen manufacturing industries, including electrical

equipment, appliances and components, primary metals,

transportation equipment, machinery as well as computer and

electronic products, reported growth last month. The chemical

products industry was the only one to report a contraction.

Susan Spence, the chair of the ISM Manufacturing Business

Survey Committee, said 62% of the comments in last month's

survey were negative and 38% were positive.

"Pricing volatility was mentioned in 57% of negative

comments, the Iran war 43%, increasing lead times 22% and

tariffs 18%," Spence said.

SUPPLY CONSTRAINTS

Some of the most negative comments were among primary metals

producers, with one complaining there was "no normalcy in sight

in the world of metals," adding that "it makes me yearn for the

coronavirus pandemic chaos, which was more manageable than

whatever this is that we are in."

Others noted that while business was at least better, the

"components of good business are not." Manufacturers of

electrical equipment, appliances and components reported that

"the pricing volatility and lead-time extensions in this market

are arguably worse than the pandemic era," adding that they were

"seeing nothing but consistent upward trends for both pricing

and lead times that show no signs of slowing down."

Makers of chemical products complained about "high freight

costs, both for truck and ocean," adding that "longer lead times

are concerning." Some manufacturers of transportation equipment

reported increased costs and transit time "for rerouted

shipments due to conflicts in the Red Sea, Strait of Hormuz and

Suez Canal." Others said competing for scarce electronics and

certain critical minerals, because of the AI buildout, was

"challenging on-time fulfillment for our supply chains."

The ISM survey's new orders measure rose to 56.7 last month

from 56.0 in June. Export orders surged and unfinished work

piled up, prompting factories to boost employment. A measure of

manufacturing employment rebounded to 52.8, the highest level

since August 2022, from 49.7 in June. Sixty percent of

respondents reported their firms were hiring, while 40%

indicated they continued to manage headcounts, the ISM said.

Strong demand is, however, running into supply constraints.

The survey's supplier deliveries index increased to 58.9

from 57.4 in June. A reading above 50 indicates slower

deliveries. The lengthening in suppliers' delivery times likely

contributed to the jump in the PMI last month, as it is normally

associated with a strong economy and high demand.

Supply constraints meant inflation at the factory gate

remained elevated last month, though the pace of increase

slowed. The survey's gauge of prices paid for inputs slipped to

a still-high 71.1 from 73.0 in June.

That reading could reflect a retreat in oil prices in June

amid a shaky ceasefire between the U.S. and Iran. Oil prices

have since risen following the collapse of the truce in July.

Iran said on Monday there were no talks under​way with the U.S.

and no plans for any meetings, contradicting President Donald

Trump who had ‌cited talks he said would take place on Monday

afternoon as justification for calling off attacks.

The Fed last week left its benchmark overnight interest rate in

the 3.50%-3.75% range. Three members of the U.S. central bank's

policy-setting committee dissented, preferring a

quarter-percentage-point hike. Inflation risks are tilted to the

upside because of the war, which is now in its sixth month.

Price increases were reported for many commodities,

including integrated circuits and memory components. Several

products, including aluminum, copper, electrical components,

rare earth components and semiconductors were scarce.

"With demand for AI still rampant, we expect electronics

prices to keep goods inflation up this year," said Matthew

Martin, senior U.S. economist at Oxford Economics. "Cost

pressures for manufacturers will be sticky in the near term."