U.S. manufacturing activity accelerated in June—but so did anxieties around electronic component shortages and tariffs. The Institution for Supply Management’s leading production index, the PMI, increased by 1.5 percent in June to 60.2. However, electronic component constraints are being felt across multiple manufacturing sectors.
“Electronic component supply issues continue to disrupt production,” a transportation industry executive told the ISM. That scenario is unlikely to change. Uncertainty around the U.S. tariff policy and a lack of predictability has many manufacturers holding off on any kind of capacity expansion. In June, the ISM reported capacitors have been in short supply for 12 months; resistors for eight; and electronic components for two.
“[These concerns], plus the threat of a trade war, are causing general business instability and [is a] drag on growth for investments,” according to a manager in components, electrical equipment and appliances. Even prior to the tariffs, electronic component manufacturers were conservative on capacity expansion.
The demand picture for U.S. goods remains a “great story,” said Tim Fiore, chairman of the ISM’s manufacturing business survey committee. “We haven’t seen this level of expansion since the China run-up in 2013 and 2014. However, the nation’s employment resources and supply chains continue to struggle. Respondents are overwhelmingly concerned about how tariff related activity is and will continue to affect their business.”
The ISM’s production index registered 62.3 percent, a 0.8 percentage point increase from May. June’s employment index registered 56 percent, a decrease of 0.3 percentage points. Supplier deliveries increased by 6.2 percent to 68.2, and inventories reached 50.8 percent, an increase of 0.6 percentage point from May. Any number above 50 indicates expansion.
“Supplier deliveries, inventories and imports had expansion increases, due primarily to negative supply chain issues,” Fiore said. “Lead-time extensions, steel and aluminum disruptions, supplier labor issues and transportation difficulties continue.”
Demand for transportation has been increasing steadily since last’s year’s hurricanes, explained Fiore, and capacity is running short. “Truckers aren’t paid well and there are now more restrictions [on hiring] regarding background checks. Demand exploded post-hurricane, but we were in a downward cycle then so there’s not enough equipment now. Drivers are also being watched electronically to cut down on ‘cheating,’ but that’s also causing transit delays.”
“Transportation costs are going through the roof right now,” said a furniture manufacturer, “which definitely impacts the decisions we’re making with regard to quantities we’re bringing in.”
Tariffs are also playing a role in extending lead times and possibly, more offshoring. With the threat of increased prices, buyers of steel and aluminum are not placing orders as they come in. Buyers are instead shopping around for better prices or are trying to leverage existing suppliers. “Now, it’s taking buyers twice as long to place an order,” said Fiore. “While they’ve been shopping, leadtimes of steel extended have further.”
An executive in miscellaneous manufacturing told the ISM that ambiguity regarding trade policies has paralyzed decision-making. “The uncertainty of U.S. tariffs and the Canada/Mexico/E.U. retaliatory tariffs continues to cloud strategic planning efforts,” the executive said. “Contingency planning [for tariffs] is consuming large amounts of manpower that could be used for more productive projects. The tariffs are improving margins in our raw material businesses; however, our businesses which are further up the supply chain are seeing significant inflation.”
Some manufacturers are already shifting production outside the U.S. to avoid tariffs. “We export to more than 100 countries,” said one executive. “We are preparing to shift some customer responsibilities among manufacturing plants and business units due to trade issues (for example, we’ll shift production for China market from the U.S. to our Canadian plant to avoid higher tariffs). Within our company, there is a sense of uncertainty due to potential trade wars.”
“The question remains: what is the counter-tariff response?” Fore said. “As it stands both margin and revenue are being impacted. Manufacturers are asking themselves how much of a tariff they should absorb versus how much they should pass on to a customer. Businesses need a planning horizon – but here we are with tariffs and manufacturers are frozen or making short-term non-value-added investment decisions. What is gets down to is [which country] will blink first.”