The U.S. manufacturing industry accelerated its growth rate in August as the nation’s leading indicator, the Institute for Supply Management’s PMI, increased by 2.5 percent from July’s level to reach 58.8 percent. New orders, production, employment, backlog and exports also increased in August, setting the stage for continued growth in September.
“August is usually a slow month for manufacturing; factories typically ramp up in September to prepare for the year-end holidays,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. “If August is at 58 – keeping in mind that any number over 50 indicates expansion—September should be strong as well.”
However, August’s data did not reflect the impact of Hurricane Harvey, which devastated Houston, Texas, and its surrounding areas toward the end of the month. Houston has a high concentration of oil and chemical refineries that were forced to shut down. “In the past month the petroleum industry was not a major factor [in the PMI] as four other big industries were in a high expansion mode,” Fiore said. “With Harvey, there’s likely to be a major disruption in [oil] production as well as in shipping channels. Texas is a major exporter as a state and with the Houston shipping channel shut down it will impact exports which, in turn, will impact imports.” The impact of Harvey could be felt for as long as six months, he said.
Chemical and oil refineries take a relatively long time to ramp up once they are shut down, Fiore added. “Let’s say they stopped production four days before the hurricane. Startup mode for refineries takes three to five days. That’s already a week of lost production.” Refineries also have to be inspected for safety issues as they ramp up, and there’s dearth of qualified technicians, Fiore said. “The normal model assumes maybe 5 percent of refineries are shut down for maintenance and repiar. Currently, that number stands at around 40 percent. There just aren't enough inspectors, which will further delay ramp-up."
For August, the ISM’s new orders index decreased by 0.1 percent to reach 60.3 percent. The production index registered 61 percent, a 0.4 percentage point increase compared to the July reading of 60.6 percent. The employment index registered 59.9 percent, an increase of 4.7 percentage points from the July reading of 55.2 percent; and the supplier deliveries index registered 57.1 percent, a 1.7 percentage point increase from July. Customer inventories, however, took a big dive—they decreased by 8 percentage points to reach 41.0. “Clearly, customers were continuing to sell and production couldn’t keep up with customer inventory,” Fiore said. Since manufacturers' backlog increased in August, that situation should improve.
Still, there will be ongoing uncertainty in the supply chain as the U.S. cleans up after Harvey. Houston is a major port for international shipping so its closure will delay deliveries. There are a number of commodities – including electronics components—that already are in short supply. Although electronics executives are avoiding the word "allocation," the ISM reports capacitors, integrated circuits and memory are scarce. The demand for parts appears to be genuine: an executive in the electrical equipment, appliances and components sector said order intake is higher than usual; and a computer company executive said business was picking up.
Moreover, prices for many finished goods may be going up. Raw materials prices increased in August for the 18th consecutive month, and Harvey futther disrupted the supply chain. "This is going to be a challenge for supply chain managers," Fiore said. The ISM is conducting a special survey of its members to measre Harvey's impact.