Following a slight cool-down period in July, the nation’s factory activity is running hot. The Institute for Supply Management’s domestic production index, the PMI, grew by 3.2 percentage points to reach 61.3 in August. Any number above 50 indicates expansion.
Moreover, the ISM’s leading sub-indexes, new orders and production, surged. New orders registered 65.1 percent, an increase of 4.9 percentage points from the July reading of 60.2 percent. The production index registered 63.3 percent, a 4.8-percentage point increase compared with the July reading of 58.5 percent.
“[New orders and production] are among the purest numbers in the index, and they are incredibly high,” said Tim Fiore, chair of the ISM’s Manufacturing Services Business Committee. “Employment improved; supplier deliveries got worse, but that’s likely because of holidays and summer vacations. Inventory is rebounding and getting in the range where it can be more flexible to factory demands. Demand remains very strong and very stable.”
The computer and electronic product sector lead August’s hot streak, said Fiore. “Production and backlogs were the highest [in August] and there is still a supplier delivery issue. But the employment number is up, and it looks like the sector is managing through any difficulties.”
Difficulties include a severe shortage of electronic components. Electronics distributors and component suppliers report they have so far been able to meet customers' demand. The ISM's production index indicates products are still getting built. However, two leading investment firms warn that shortages will worsen as the year wanes on. Manufacturing tends to ramp up in autumn in anticipation of the holiday season.
"Production and output is at an all time high -- lots of things are being built and products are getting out there," said Andy King, president of Arrow Electronics Inc.'s Global Components business, in a recent interview. "Is every [supplier] ramping up to levels we aspire to--no. That's why [Arrow] is making sure we can get the right amount of inventory as much as we can." Arrow's achieving that for most components, he added.
Although the ISM tries to strip seasonality out of its numbers, Fiore believes a typical summer slump was experienced in July. “Ongoing demand is supported by low customer inventory numbers, and backlog grew,” said Fiore. “Demand will be very strong as we enter the traditionally active manufacturing months. As long as demand is strong, all you have left is managing the issues.”
Tariffs top the list of issues. Fully one-half of comments by ISM respondents in August mentioned tariffs, but the real focus has been on ongoing demand. “We have seen a slight uptick in international business,” said an executive in computer and electronic products. “Suppliers do not seem to know how to handle the recently imposed tariffs. Most are waiting to re-evaluate potential price increases until September.”
Amidst all the positive news, the manufacturing sector presents some underlying concerns. “From a national economic standpoint output softened and there are a lot of comments on imports and exports. Imports are maintaining rates and some deliveries are being accelerated to avoid the impact of tariffs. That is a bit of a concern, although export levels remained the same. But two sectors contracted in August, and both use a lot of aluminum and steel. Those are sizable portions of the manufacturing economy.”
The ISM’s employment index registered 58.5 percent in August, an increase of 2 percentage points from the July reading of 56.5 percent. Supplier deliveries registered 64.5 percent, a 2.4-percentage point increase from the July reading of 62.1 percent. Inventories registered 55.4 percent, an increase of 2.1 percentage points from the July reading of 53.3 percent, and the prices index registered 72.1 percent in August, a 1.1-percentage point decrease from the July reading of 73.2 percent. That indicates higher raw materials prices for the 30th consecutive month.
“There is a bit of see-sawing [among manufacturers],” Fiore said. “There were a lot of comments on lead time extensions, and tariffs remain in high visibility. Business are now planning for 2019 and their executives are asking for options to offset price increases. There’s a whole lot of guessing going on and managers have to go to their boards for [spending] approval. Most managers don’t want to go their CEO and say, ‘this is what I think we should do based on our best knowledge.’”
Demand is still robust, but the nation’s employment resources and supply chains continue to struggle, Fiore concluded. “Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty."