The electronics sector helped drive U.S. manufacturing activity to a 37-year high in March as pent-up demand emptied customers’ shelves and firmed up expectations for a widespread economic recovery. There are no signs demand will abate, according to the Institute for Supply Management, although factories will face supply and labor constraints at least through the third quarter.
“Extended lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are affecting all segments of the manufacturing economy,” said Tim Fiore, chair of the ISM’s manufacturing survey committee.
The U.S. PMI hit 64.7 percent in March, an increase of 3.9 percentage points from February’s reading of 60.8 percent. New orders – a leading indicator of demand – reached 68 percent, up 3.2 percent from the prior month. Of the 18 manufacturing industries polled by ISM, 17 reported growth in March, led by textiles, electrical equipment, machinery and electronics products.
“Even if there weren’t headwinds, demand is overwhelming,” said Fiore. “No one would be able to keep up with it. There are no signs new orders will be slowing down, and that’s a big positive for the industry.”
Fiore pointed to March’s record customer inventory and backlog indexes as forward-looking indicators. Backlog reached 67.5 percent, 3.5 percentage points above February’s 64 percent and the highest figure since 1993. Customer inventories decreased 2.6 percent to 29.0, a record low since 1997.
Any reading above 50 reflects industry expansion; numbers below 50 indicate contraction.
“The rebound has been so dramatic because of where we were,” Fiore explained. “We’d laid everyone off, shut down docks, were cautious about inventory and investment – capex was reduced – so suppliers haven’t been able to respond to the demand surge fast enough. That said, manufacturing has a better growth profile than in 2018 and overall, we’re doing great.”
March's production index hit 68.1 percent, a 4.9 percent increase from February.
Manufacturing employment grew for the fourth straight month, said Fiore, but factories are facing a skills shortage and high turnover. The ISM’s employment index reached 59.6 percent, up 5.2 percentage points from February.
“Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential,” he said. Employment and logistics issues that have dogged the supply chain for months continue to accelerate.
“Late-winter storms in unexpected [areas] of the U.S. had our organization exercising business-continuity plans on a much more aggressive scale than anticipated,” said one electronics executive. “While the storms slowed our supply chain down, we did what we could to meet orders, even though few were short.”
Cargo bottlenecks worsen
The ISM’s March survey didn’t reflect the impact of a stranded cargo ship in the Suez Canal, but logistics experts anticipate increasing transportation issues.
“The Ever Given is now free, but after blocking traffic through the Suez for more than six days, and another estimated six days until the backlog of more than 360 ships – including 96 container ships – is cleared, the impact in the form of delays, congestion, equipment availability and freight rates is expected soon,” according to Freightos, a freight marketplace.
“About two weeks’ worth of ocean capacity or about 6 percent of all global container capacity has been impacted by the closure, with Maersk estimating that 20 percent to 30 percent of its total capacity has been tied up and will take several weeks to resolve.”
Materials shortages – including semiconductors – and transit inefficiencies are driving up production costs. For example, trucks aren’t transporting full loads as suppliers try to expedite orders. A second delivery is required to complete the order, adding to transportation expenses. The ISM’s measure of prices paid by manufacturers last month hovered near its highest rate -- 85.6 percent -- since July 2008. Electronic components are both in short supply and up in price.
The Suez blockage is really just the latest (and most visible) example of ongoing congestion that has plagued maritime supply chains for over half a year, according to Freightos. “While it stands to create additional unanticipated ebbs and flows at ports, those ports were already congested, and have been for months. For now, this congestion might just be the new normal.”
Manufacturers are increasingly bullish about the future despite supply constraints. ISM manufacturing panelists in March expressed eight positive comments for every cautious comment, compared to a 5-to-1 ratio in February.
“We feel that in the coming month, we will be able to make up the misses as well as continue strong deliveries in the next month,” said the electronics executive. “As consumer confidence grows and the academia market reopens globally, we do expect orders to increase.”