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Labor and supply constraints continue to limit U.S. manufacturing momentum even as demand remains robust. The nation’s leading factory index, the PMI, declined 4 percent in April, but depleted customer inventories and increasing factory backlogs bode well for the long-term health of the industry.
“Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” said Tim Fiore, chair of the Institute for Supply Management’s manufacturing survey committee.
Still, the PMI, at 60.7 percent; new orders at 64.3; and production at 62.5 remain well above 50 -- the line of demarcation between contraction and growth. Production, said Fiore, is managing well despite materials constraints, labor shortages and continuing transportation disruption. Inventories at factories and customers are extremely lean, which should keep production humming.
The current semiconductor shortage is being felt across all manufacturing sectors -- lead times have extended and prices have increased. “There appears to be a general inflation of prices across most, if not all, supply lines,” said one tech executive. The chip shortage was cited by multiple industries as a constraint to growth.
“We have had to trim some production due to the global chip shortage,” said a buyer in transportation equipment. “It hasn’t affected inventories greatly yet, but a continued decrease will begin to reduce available inventories if we don’t recover chip supply shortly.”
The tech sector itself slowed down in April with several measures falling below the industry average. “What I think we are seeing is the impact of not being able to acquire raw materials,” Fiore explained. “Electronics contracted more heavily on the inventory side than the overall industry, and backlog was higher than average in April. It’s not a lack of demand; it’s really about the inability to get materials.”
Demand for goods like motor vehicles and electronics has surged during the pandemic as Americans avoided public transportation and millions worked from home and took classes remotely.
Labor
Manufacturers’ employment rate slowed in April, from 59.6 percent to 55.1. Factories can’t find skilled labor and are having difficulty retaining the workers they have. “Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential,” said Fiore. Manufacturers are facing wage hikes as factories compete over a limited labor pool.
Transportation
Companies are having problems getting the supplies they need, and those that have products can’t get them to customers fast enough. Cargo ships are backed up at ports, and land transportation is facing a shortage of drivers. In order to expedite orders, trucks are only partially filled before they head out for delivery. Orders that normally arrive as one shipment now take two or three. Inefficiency, said Fiore, is being reflected in price increases.
Many shippers are paying well above spot rates to secure an ocean booking, according to freight marketplace Freightos. Goods-driven demand for ocean freight will eventually ease, but not very soon. May is expected to be another extremely busy month and depleted inventories will mean elevated ocean volumes even after consumer demand shifts to the services sector.
Prices
The ISM’s April prices index registered 89.6 percent, up 4 percent from March’s 85.6, indicating continued supplier pricing power and scarcity of supply chain goods. “People are paying higher prices to get the materials that they need,” Fiore said. “If suppliers can get it to them in six weeks – not 10 – they’ll pay whatever vendors are asking.”
“In 35 years of purchasing, I’ve never seen everything like these extended lead times and rising prices — from colors, film, corrugate to resins, they’re all up,” said an executive in the plastics industry.
Factory inputs — expressed as supplier deliveries, inventories, and imports — continued to reflect supply-driven constraints. The importation of items marginally slowed in April, driven by port backlogs. New export orders for U.S.-made goods increased by 0.4 percent in April, from 54.5 percent to 54.9. Imports slowed by 4.5 percent, from 56.7 in March to 52.2 percent.
Increasing optimism
None of the industry’s headwinds are expected to ease in the short-term. Enhanced unemployment benefits, which are keeping some workers off the job, don’t expire until September. Global seaports, which have been backlogged since the holiday season, face added disruption from the Suez Canal grounding and weather-related events. “I don’t think we’ve hit the peak of supply problems,” Fiore said.
Despite the immediate struggles, optimism among manufacturers has steadily risen since August of 2020. The ISM’s April survey found 11 positive comments for every cautious comment, compared with an eight-to-one ratio in March.
“A PMI of 60.7 is really good,” Fiore said. “I’d rather have demand for this stuff than not need it. I’d rather have a supply problem than one of no demand.”
