Demand remains high for U.S.- made products even as manufacturers contend with price increases, labor shortages and supply constraints. The Institute for Supply Management’s PMI reached a three-year high in February to 60.8, an increase of 2.1 percentage points from the January reading. Signs for future demand remain strong, but supply chain pressures are unlikely to ease anytime soon.
New orders reached 64.8 percent in February, up 3.7 percent from January’s reading. Production reached 63.2 percent, an increase of 2.5 percent from the prior month. Any number above 50 indicates manufacturing expansion; any number below 50 is a sign of contraction.
“Manufacturing performed well for the ninth straight month, with demand, consumption and inputs registering strong growth compared to January,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. “Labor-market difficulties at panelists’ companies and their suppliers continued to restrict manufacturing-economy expansion and will remain the primary headwind to production growth until employment levels and factory operations can return to normal across the entire supply chain.”
Electronics was among the top growth sectors in February despite tightening supplies of semiconductors and other electronics components.
“The coronavirus pandemic is affecting us in terms of getting material to build from local and our overseas third- and fourth-tier suppliers,” said an electronics executive. “Suppliers are complaining of [a lack of] available resources [people] for manufacturing, creating major delivery issues.”
The ISM listed electronic components in “short supply” for the third straight month and semiconductors, capacitors and resistors as experiencing a price hike. ISM’s prices index registered 86 percent, up 3.9 percent from January’s level of 82.1.
The components shortage is due to the automotive industry, which grew more than expected in Q4 2020. Not only has this constrained manufacturing expansion; car companies are shutting down production. This could hurt the overall economy, Fiore said.
Volkswagen, Ford, Fiat Chrysler, Toyota and Nissan are among automakers that have delayed production due to scarcity of semiconductors.
Although factory employment gained ground – the employment index increased 1.8 percent to 54.4 – labor remains a global manufacturing issue.
“Companies and suppliers continue to operate in reconfigured factories. Issues with absenteeism, short-term shutdowns to sanitize facilities, and difficulties in hiring workers remain challenges and continue to cause strains that limit manufacturing-growth potential,” Fiore said. It’s unlikely employment will be “normalized” until Covid-19 vaccines reach all workers, he added. August or September is the time frame cited by health experts.
Any doubts about demand, however, were dispelled in February as backlog increased, customer inventories remained low and orders grew. Backlog reached 64 percent, 4.3 percentage points above the January reading of 59.7. Customer inventories remain too low and at 32.5 percent tie an all-time record, said Fiore. This bodes well for future production.
Inputs — expressed as supplier deliveries, inventories and imports — continued to indicate input-driven constraints to production expansion, though, at higher rates compared to January. The inventories index returned to contraction territory and supplier deliveries slowed down for another month, Fiore continued.
Imports marginally slowed in the period, driven by port backlogs. The prices index expanded for the ninth consecutive month, indicating continued supplier pricing power and scarcity of supply chain goods.
“Things are now out of control,” according to an electrical components and appliances manager. “Everything is a mess, and we are seeing wide-scale shortages.”
Overall, though, optimism about the business environment is growing. Of the six biggest manufacturing industries, five — chemical products; fabricated metal products; transportation equipment; computer and electronic products; and food, beverage and tobacco products — registered strong growth in February.
“Optimistic panel sentiment increased,” said Fiore, “with five positive comments for every cautious comment, compared to a 3-to-1 ratio in January.”
“Manufacturing is doing well but it will not be smooth sailing over the next few months because of supply-chain disruptions, slow delivery times and a global shortage of semiconductors,” Ryan Sweet, a senior economist at Moody’s Analytics, told Reuters.