U.S. Production Cools; Electronics Demand Remains Strong

October was a mixed bag for the U.S. manufacturing industry as some sectors benefited from hurricane recovery efforts while others suffered. A shortage in the resin market resulted in price increases, inventory constraints and increased lead times for computer and electronics products, according to one executive.

Resin is among many chemicals processed in the Houston area, which was hit by Hurricane Harvey in August. Chemical processors are seeing higher raw materials prices, although businesses have been able to work around shortages created by several hurricanes, according to the Institute for Supply Management. The machinery and transportation industries are seeing an uptick in orders as Houston and other hurricane-ravaged areas continue to rebuild.

Overall, the nation’s leading factory index cooled somewhat in October. The ISM’s PMI decreased by 2.1 percentage points in October to 58.7 percent. Any number above 50 indicates manufacturing expansion. Every other index tracked by the ISM also decreased: new orders declined 1.2 percentage points to 63.4 percent; production declined 1.2 percent to 61 percent; and employment registered 59.8 percent, down 0.5 percentage point from the September reading.

Still, the economy continues to expand -- October was the 101st consecutive month of growth -- with order backlogs and export orders all continuing to grow in October. Supplier deliveries slowed, indicating improvement, and inventories contracted. Prices, however, increased for the 20th consecutive month.

“Compared with September the index trend was negative and we are seeing the impact of the hurricanes,” said Tim Fiore, chair of the ISM’s Manufacturing Business Survey Committee. “On the demand side, though, we were up three points using August as a recent point of ‘normalcy,’ 58.7 is still really strong number and sets the tone for the rest of the year.”

On the consumption side of the index, Fiore said, production and employement slipped but compared with August they’ve reached levels the ISM hasn’t seen since 2011. “The employment numbers overall are good; they’re really strong,” Fiore said. “On the [factory] input side we saw a decline month to month driven by an inventory drop and a struggle with deliveries. The inventory contraction reflects the difficulty of the supply chain to deliver materials and services meeting production schedules. So that’s a problem with the overall index—we’re still clearing away the effects of the hurricanes.”

Fiore expects once the hurricane impact clears, the manufacturing sector could be looking at a decent level of orders through the end of the year. “The average for the year is running close to 57 and if that works out we’ll be looking at 4 percent growth for 2017,” he said. “My only concern is that new order input wasn’t as strong as we’d like to see and there was slight growth in customer inventories. There was also a three-point decline in backlog; I would have hoped backlog stayed stronger.”

The ISM also reported some electronic components – capacitors and memory in particular -- have been in short supply for six months. However, component sales through the distribution channel grew during the third calendar quarter of 2017, according to a separate report from the Electronic Components Industry Association (ECIA). Distribution sales were up 2 percent from the prior quarter and 12 percent year-over-year. Distributor bookings improved to 1.29 from 0.96 in Q2.

Through the first three quarters of 2017, distributor sales are up 9 percent compared to the first three quarters of 2016. North America distributor sales by product segment, to date, were: semiconductors, up 59 percent; interconnect, up 16 percent; passives, up 13 percent; electromechanical, up 10 percent; and displays, up 2 percent.

Distributors remain optimistic that Q4 will be remain strong, the ECIA said. Forecasters expect growth opportunities around American infrastructure development, automotive, and medical. Many analysts are projecting growth across most all business sectors through 2018. “Incoming orders are strong, mainly due to recovery efforts in the wake of Hurricanes Harvey and Irma," a machinery executive told the ISM. "Backlogs are up due to operating inefficiencies.” In transportation equipment, "business continues to be better than expected," one manager said. Sixteen of the 18 industries tracked by the ISM reported growth in October.