The U.S. manufacturing sector continued its expansion in May, but shortages of components, raw materials and labor are constraining factories’ ability to meet skyrocketing demand.
“Supplier performance — deliveries, quality, it’s all suffering,” a tech executive told the Institute for Supply Management. “Demand is high, and we are struggling to find employees to help us keep up.”
The ISM’s leading factory index, the PMI, increased by 0.5 percentage point to 61.2 in May. Any number above 50 indicates expansion, and the forward-looking new orders index hit 67 percent, a 2.7 percent increase from the prior month.
Production, however, slipped 4 percent to 58.5 as factories deal with absenteeism, attrition and competition for skilled workers.
“Rather than headwinds, I’d say manufacturing is facing an obstacle course,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “There are shortages everywhere – materials, labor, logistics capacity – but there is still great demand with no end in sight.”
The buyer’s market has enabled materials suppliers to raise prices, but manufacturers seem to be successful in passing those costs on to customers. “We won’t know for sure until the second quarter,” said Fiore, “but right now the environment is ‘I’ll take whatever you can give me and you can charge me for it.’”
Chip makers and foundries have successfully raised prices, according to TrendForce, which recently reported record Q1 revenue for the world’s top 10 fabs. All industries are reporting price hikes, said the ISM, with everything from aluminum to wood becoming more expensive and less available.
Manufacturing employment decreased last month with the ISM’s index dropping 4.2 percent to 50.9. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues. Problems with child care and fears of contracting the virus, even with vaccines widely accessible, as well as pandemic-related retirements have also been blamed for keeping workers home.
Labor shortages are impacting internal and supplier production, according to a manager in the electrical industry, who added "logistics performance is terrible.”
Fiore noted that roughly 20 states in the U.S. are scaling back their unemployment benefits and federal supplements are scheduled to end in September. “That will open up the labor market which is holding manufacturing expansion back,” Fiore said. “At least there’s light at the end of that tunnel.”
In spite of the hurdles, the long-term demand environment has manufacturers optimistic. ISM reported 36 positive comments for every cautious remark, compared with an 11-to-1 ratio in April. Backlogs are at record highs, said the ISM, and inventories remain extremely low. While there is no end to supply constraints in sight, demand isn't expected to decline.
“Manufacturing performed well for the 12th straight month, with demand, consumption and inputs registering strong growth compared to April,” Fiore said. “Companies and their supply chains continue to struggle to respond to strong demand due to the difficulty in hiring and retaining direct labor. Record backlog, customer inventories and raw material lead times are being reported. The manufacturing recovery has transitioned from first addressing demand headwinds, to now overcoming labor obstacles across the entire value chain.”
Other highlights from May include:
- Backlog reached 70.6 percent, 2.4 percentage points higher from the prior month
- Supplier deliveries grew by 3.8 percent to 78.8
- Inventories registered 50.8 percent, 4.3 percentage points higher than April
- Prices reached 88 percent, down 1.6 percentage points from the prior month
- New export orders grew 0.5 percent to 55.4
- Imports registered 54 percent, up 1.8 percent from April
The highs and lows of the past 14 month have, in some cases, tied records set in the 1940s and 1950s, said Fiore. Many veteran purchasing experts have never seen the kind of volatility in demand, pricing and lead times manufacturers have experienced during the Covid-19 crisis.