Growth in the domestic manufacturing sector has slowed for two months in a row following upbeat expectations toward the end of last year. Although a two-month deceleration is not uncommon, manufacturing is facing a couple of headwinds that have appeared in recent months. One is the price of gas and oil; the other a work stoppage on the West Coast.
In its January report on business, the Institute of Supply Management (ISM) reported its leading purchasing manager index (PMI) declined 1.6 percentage points to 53.5 percent. Although any number above 50 indicates industry expansion, the PMI was as high as 58.1 in August of last year.
While low oil prices are putting dollars back in consumers’ pockets, companies that serve the petroleum and coal products sector are feeling their customers’ pain. Electronics companies supply components and systems to the industrial companies that drill and refine oil and for the equipment these companies use. While food, tobacco and beverage producers are seeing their demand tick up as consumers loosen their purse strings, not all boats are rising with the tide. In spite of declining gas and oil prices, both UPS and FedEx raised their fuel surcharge prices in early February. A computer and electronics executive told the ISM that sales have stayed strong “even with the dip in oil prices.”
Economists differ on whether the drop in oil prices is a good thing or a bad thing. “The oil dynamic has a plus or minus impact depending on where in the industry you sit,” said Bradley J. Holcomb, chair of the ISM’s Manufacturing Business Survey Committee. Companies that would normally buy oil and petroleum products on a regular basis are holding off to see if prices dip lower. Companies might be delaying their capital expenditures as CFOs try to figure out oil’s long-term impact. Logistics companies such as UPS and FedEx aren’t passing their savings on to their customers. So it would appear the drop in oil prices is not having a positive effect on manufacturing.
Sitting on the docks
Even if logistics companies cut their prices, not every product has somewhere to go. Some manufacturers can’t sell their products because they can’t ship them. A work slowdown at two U.S. ports on the West Coast – Los Angeles and Long Beach – is taking its toll. “[The] West Coast port slowdown is getting serious,” a paper products executive told the ISM. [Our] Mill has 40+ days of production at the ports and various warehouses.” “Dock problems in California continue to delay shipment out of the West Coast,” said a chemical products executive. When products don't ship, inventories build. Manufacturers’ inventory of raw materials in January registered 51 percent, an increase of 5.5 percentage points above the December reading of 45.5 percent.
Many of the supply chain solutions that have been introduced in recent years were developed to allow companies to change their processes on a dime. Cloud-based supply chain platforms such as GT Nexus and E2open allow select partners to communicate with one another in real time about issues such as delays in shipment. This enables companies to divert shipments to other destinations or find alternative suppliers.
But sometimes turning on a dime isn’t possible or even practical. The West Coast work slowdown is linked to contract negotiations between dock workers and the local port authority. News reports have said little progress has been made on contract negotiations and the slowdown is likely to drag on. Experts expect that manufacturers will begin to ship from alternative ports including those on the East Coast. However, this will add cost for any company that has to transfer cargo from Los Angeles or Long Beach to another location. It will also add weeks to delivery schedules.
Another issue related to labor – finding skilled workers – also concerns manufacturers. In its Semiannual Economic Forecast, ISM panelists were asked about job openings. The top three responses were “Currently have a typical number of unfilled job openings” (39.5 percent), “Cannot find enough qualified applicants to fill job openings” (28.8 percent), and “Hiring less than usual due to economic uncertainty (18.6 percent).”
In a similar study of its members Prime Advantage, a purchasing collective, found the biggest barrier to business growth over the next 12 months is a lack of qualified workers, with 53 percent of respondents voicing this complaint. (see chart below)
Legislative and regulatory pressures are also seen as a significant threat to the bottom line, with 45 percent of companies keeping a close eye on evolving policies handed down from Washington and local governments.
The 2nd Quarter PwC Manufacturing Barometer and NAM/IndustryWeek survey report similar percentages for workforce concerns of 47 percent and 50 percent respectively. However, NAM sees the primary concern as rising healthcare costs and PwC continues to see legislative and regulatory pressures as the primary concern.
Experts warn against reading too much into recent trends. “We’ve seen [back-to-back deceleration] before,” said the ISM’s Holcomb. Oil and gas prices are cyclical, he adds, and are currently in a downturn. That will make statistics look even better when that sector rebounds. Hiring, though, is a longer-term challenge. Respondents to the PwC survey said in addition to hiring talent (92 percent), they plan to tackle the labor shortage by training existing employees (86 percent). Sixty percent will use outside contractors, and 52 percent will redeploy talent from different functions/areas.