U.S. factory activity in September surged to its highest level in 13 years amid strong growth in new orders and healthy levels of production. The Institute for Supply Management’s leading index, the PMI, increased by 2 percentage points from August to reach 60.8 percent. Any number above 50 indicates industry expansion.
Even as manufacturers continue to assess the impact of several devastating storms on the U.S., new orders grew 4.3 points in September to 64.6 percent and production increased 1.2 percentage points to 62.2. “Order input continues at a strong pace, averaging 61.6 percent since December 2016, setting the pace for production activity,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. Although both indexes were bolstered last month by hurricane-related replenishment orders, “even without the hurricanes the manufacturing numbers look pretty good,” he said. “Production remains at strong growth levels in most industries, in spite of weather conditions and supplier delivery constraints experienced during the period.”
Supplier deliveries and inventories both grew at a slower pace in September. Supplier deliveries increased by 7.3 percentage to points to 64.4 and inventories decreased by 3 percent to 52.5. “There was clearly some struggling to meet demand,” Fiore said. “There’s also some concern going forward that disruption in the raw materials supply chain could impact production. If supplies constrain output, then output could constrain economic growth.” Customer inventories also remained anemic at 42.0 percent: “The index remains at a low level, indicating that downstream customers continue to operate at a high level of demand that production cannot fully satisfy,” says Fiore.
Comments from the ISM’s manufacturing panel reflected expanding business conditions, with new orders, production, employment, order backlogs and export orders all growing in September. Seventeen out of the 18 industries tracked by ISM experienced growth. The computer and electronics product sector saw strong demand from the energy sector where prices of gas and oil are stabilizing. However, prices across the board are increasing: The ISM’s price index grew 9.5 percent to 71.5. “We are closely watching the Houston events as many of our production chemicals are produced in the Gulf region,” said one supply chain executive. “Some tightening of supply and/or price increases expected.”
There's been a slight increase in the number of commodities in short supply or that have experienced price increases. Commodities up in price include aluminum, brass, copper, electronic components and more recently plastics and plastic resins. Commodities in short supply include capacitors, memory, polyvinyl chloride, resistors and titanium dioxide.
The plastics shortage – related to Hurricane Harvey’s impact – is having unexpected consequences, Fiore said. The packaging industry has been affected because so much small-package supply has been diverted to the U.S. Virgin Islands and Puerto Rico by FEMA.
It may still be several months before the full impact of the storms is felt. The replacement of finished goods destroyed by the storm will benefit manufacturers while materials price increases will challenge them. Plastics and chemicals may face long-term availability issues. “I think most of these issues will work themselves out,” Fiore said. “Overall, the underlying dynamics in the manufacturing industry remain strong. I think we’ll close out the year out in a good position.”