U.S. manufacturing activity remained robust at the start of the year although pandemic-related supply and worker constraints curtailed production and drove prices up. The Institute for Supply Management’s manufacturing index, the PMI, decreased by 1.8 percent in January to 58.7 from the December level of 60.5.
The index remains well above 50, the line of demarcation between contraction and growth. Production slipped by 4 percent, to 60.7 percent from 64.7; and new orders decreased by 6.4 percent to 61.1. Prices paid by U.S. factories jumped by 4.5 percent to the highest level in nearly a decade.
Nevertheless, January’s report was solid and there are no reasons for concern, said Tim Fiore, chair of the ISM’s manufacturing survey committee. Customer inventories remain low and manufacturers’ backlog is increasing – both positive signals for future production. Solid demand continues to support the factory rebound as the orders and production indexes remained elevated with readings above 60.
However, Covid-19 flare-ups continue to cause labor shortages in factories, among suppliers and in key transportation hubs.
“Survey committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are continuing to cause strains that limit manufacturing growth potential,” said Fiore.
The January employment index registered 52.6 percent, a 0.9 percentage point higher than December’s 51.7 percent.
Supply constraints are more prevalent with international suppliers than with U.S. vendors, a tech executive told the ISM. “Supplier factory capacity is well utilized. Increased demand, labor constraints and upstream supply delays are pushing lead times,” the executive added. Congestion at U.S. ports, particularly in California, are creating stock bottlenecks as well.
Supply delays could be one of several factors behind January’s price hikes, according to Fiore. Demand has increased. In the ISM’s semiannual forecast, manufactures said they plan benefit and wage increases for workers in 2021. Media outlets such as Bloomberg and Reuters are predicting inflation, but Fiore said it’s too soon to tell.
For example, chip makers in the tech industry started raising prices toward the end of 2020 as they planned for future upgrades in capacity. Recent earnings calls indicate impending shortages of processors, DRAM and other active components, which could also jack up prices. The automotive industry, which had creased production in early 2020, rebounded significantly at the end of 2020, driven by demand in the Chinese market. Chip makers had not ramped up production in Q3, anticipating a seasonally lackluster Q4.
Overall, inputs — expressed as supplier deliveries, inventories and imports — continued to indicate input-driven constraints to production expansion, at higher rates compared to December, as indicated by minimal gains in inventory levels and declining supplier performance, according to the ISM. New export orders registered 54.9 percent, a 2.6 percent decrease, while import orders increased by 2.2 percent to 56.8.
“Manufacturing performed well for the eighth straight month, with demand, consumption and inputs registering strong growth compared to December,” said Fiore. “Labor market difficulties at panelists’ companies and their suppliers will continue to restrict the manufacturing economy expansion until the coronavirus crisis abates.”
Some industries “are hurt and struggling more than others,” he added, “but generally I think if we could get the material and get the people we could increase the production output here and start to fill shelves and work off some of that backlog.”
The ISM has seasonally adjusted its monthly manufacturing report; January data reflects those adjustments.