U.S. manufacturing activity in December surged to its highest level in more than two years despite supply chain disruptions and Covid-19-related employment constraints. The Institute for Supply Management’s purchasing index, the PMI, reached 60.7 last month, an increase of 3.2 percent from its November reading.
Any reading above 50 indicates manufacturing expansion.
The tech industry was one of the top performers in December with both new orders and export orders expanding at healthy levels, said Tim Fiore, chair of the ISM’s manufacturing survey committee.
“Our company and industry are continuing to have tailwinds from the Covid-19 pandemic research support for vaccines and treatments,” one executive told the ISM. “While our services are delayed, many customers are not cancelling outright, and business picked up for us in the last month — especially in China, where business growth is back on track.”
Across industry sectors, new orders reached 67.9 percent, up 2.8 percent from the prior month. Production registered 64.8 percent, an increase of 4 percent. Backlog grew by 2.2 percent to 59.1. The backlog number is positive for future production, added Fiore, but combined with lower inventory levels outpaced production in December.
One of the headwinds to higher output is employee absenteeism and shutdowns to sanitize facilities, Fiore explained. Although employment retuned to expansion territory – up 3.1 percent to 51.5—workforce constraints remain a global concern. Many workers are ill or are quarantined due to possible Covid-19 exposure. Others fear contracting the virus and abandon the workforce. U.S. manufacturers say employment shortages within their supply base is hampering production.
“Covid-19 outbreaks are causing supply chain issues for Tier-1 and Tier-2 suppliers,” said a transportation equipment executive. “More work needs to ensure suppliers keep us in the loop with any problem in their supply chain. But end-customer demand for products is keeping production and future outlook positive.”
Inputs — expressed as supplier deliveries, inventories and imports — continued to indicate input-driven constraints to production expansion, at higher rates compared to November, Fiore added.
A second headwind is the supply chain itself, which is sluggish across the globe. Ports have been congested for months and there is no sign of easing, said Fiore. That has impacted materials imports and several industry sectors, including tech, are seeing inventory constraints. Commodities in short supply, the ISM reports, include electrical and electronic components and specifically, semiconductors.
Prices paid by manufacturers reached their highest level since 2018. For suppliers this is good news – they’ve been able to boost profits and recoup some of the losses sustained in the spring of last year. It’s not evident, yet, whether those prices will be passed on to customers. If demand remains high, manufacturing may be able to sustain a widespread cost increase.
If prices remain high due to sourcing constraints, it’s a different story. “Supply chain gridlock is driving up costs for manufacturers,” reported Reuters. “That raises the risk of higher inflation this year, though high unemployment could limit price pressures."
Overall, manufacturing closed 2020 in better shape than experts expected. In December, the production index hit a 10-year high (the last reading above 64.8 percent was in January 2011) with five of the top six industries reporting moderate to strong expansion. ISM panel sentiment remains optimistic, with three positive comments for every cautious comment, Fiore said. Customer inventories remain “too low,” a positive factor for future production.
The sector also sees light at the end of the tunnel in the form of Covid-19 vaccines. Even with additional shutdowns, the industry has learned to manage around virus-related restrictions.
“If it happens again, we know what to do and what not to do,” Fiore said. “We know how to deal with it.”