U.S. Factory Output Continues to Expand

The U.S. manufacturing sector is poised to close 2017 as a year of expansion. Despite back-to-back hurricanes that disrupted a major center of oil and chemical processing and shipping in the late summer, U.S. production increased by nearly 3 percent in November to 63.9 percent, setting the nation’s factory index at 58.2 percent. Although the growth pace of the PMI slowed somewhat from October's level of 58.7, the Institute for Supply Management recorded November as the 102^nd consecutive month of manufacturing expansion.

“We have been talking about the effects of the [August and September] hurricanes, and those showed up in supplier deliveries which in September were 64.4 percent,” explained Tim Fiore, chair of the ISM manufacturing business survey committee. “November’s number –which decreased 4.9 percent to 56.5—show suppliers are still struggling, but not as badly.” A reading below 50 percent indicates faster deliveries, while a reading above 50 percent indicates slower deliveries.

The PMI is hovering at pre-hurricane levels, Fiore said, indicating continued underlying strength in the U.S. manufacturing industry. “The big story is around new orders and production,” he added. New orders increased 0.6 percent in November to 64.0. “We’ve had 6 months of new orders above 60, so 64 is a really good level.”

Purchasing managers in the computer and electronics products sector report business has leveled out but remains strong heading into the end of the year. Although electronics distributors report customers want more inventory then they have now, distributors have been able to meet demand. Comments from the ISM manufacturing panel reflect expanding business conditions across most sectors, with new orders and production leading gains; employment expanding at a slower rate; order backlogs stable and expanding; and export orders all continuing to grow in November. Supplier deliveries continued to slow but at slower rates, and inventories continued to contract during the period. Price increases also continued, but at a slower rate. Customers' inventories improved, but remains at low levels.

“If you look back at inventory levels in August, they were at 55.5 percent,” said Fiore. “We thought that people might be keeping levels low to close up the quarter. Inventory levels are now at 47, and one factor may be that suppliers are struggling and not getting inventories up; or they’re managing their working capital and making sure inventories are still at a minimal level. We expect inventories will stay at the 47 to 48 range and supplier deliveries will stay in the mid-fifties.”

The November employment index registered 59.7 percent, a decrease of 0.1 percentage point from the October reading of 59.8 percent; and the inventories index registered 47 percent, a decrease of 1 percentage point from the October reading of 48 percent. The prices index registered 65.5 percent in November, a 3 percentage point decrease from the October level of 68.5, indicating higher raw materials prices for the 21st consecutive month.

“Everybody is generally positive and I think we are finally exiting the hurricane issue,” Fiore added. “At this point I’m reading price increases in plastics but as we get farther away from the hurricanes I think the number of comments around price increases are declining. Although there are still electronics components in short supply, things seem to work themselves out and comments from the machinery industry indicates that the semiconductor equipment industry remains strong. I think it’s positive that new orders are up and overall we’re making progress.”

Still, the electronics industry is facing some product lead times stretching well into next year. Although capacitors and resistors -- which are still in short supply, according to the ISM -- are relatively low-priced devices, they are ubiquitous on electronics printed circuit boards. So far, component makers have not widely been able to pass price increases on to end customers. “In general, we’re seeing the same behaviors that we’ve experienced during other constraint cycles,” said Chuck Delph, president of Electronics Marketing for distributor Avnet Inc. , earlier this year. “The one difference is that although there have been some price increases by the suppliers, they haven’t been as pervasive as in previous cycles. We haven’t experienced any supplier push back on our demand, and we continue to work closely with our supplier partners to support our customers’ needs during this constrained period.”

The PMI's average for 2017 stands at 57.4 percent.