The pace of U.S. manufacturing expansion exceeded expectations in June, according to the Institute for Supply Management. The ISM’s production index, the PMI, increased 1.5% from the prior month to reach 60.2. However, U.S. manufacturers are not able to get enough electronic components, some raw materials, and now, transportation to meet demand.
“The demand picture remains great,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee, adding that the ISM’s new order index has been at 60% or above for the 14th straight month—any number above 50 indicates growth. “We haven’t seen this level of expansion since the China run-up in 2013 and 2014," he said. "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.”
Nearly 40% of manufacturing respondents to June’s survey cited tariffs or shortages as their biggest concerns. “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.
“[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 ISM’s production index registered 62.3%, a 0.8 percentage point increase from May. June’s employment index registered 56%, a decrease of 0.3 percentage points. Supplier deliveries increased by 6.2% p to 68.2, and inventories reached 50.8%, an increase of 0.6 of a percentage point from May.
“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,” he explained. “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 investment decisions. “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?” Fiore 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.”