The pace of U.S. manufacturing growth cooled a bit in July as factories continued to struggle with labor and supply constraints. But some pressures appear to be easing: prices paid by manufacturers declined 6.4 percent between June and July, according to the Institute for Supply Management, and factory employment increased.
Overall, the nation’s PMI decreased 1.1 percent to 59.5 in July. New orders declined 1.1 percent to 64.9; production decreased 2.4 percent to 58.4; and prices moved from 92.1 – the highest level since July 1979 – to 85.7.
Manufacturing continues to maintain a very strong growth profile, said Tim Fiore, chair of the ISM’s manufacturing survey committee, as any number above 50.0 indicates expansion. Lack of direct labor and raw materials continued to be constraints to production growth, but less so compared with June, he added.
Demand for computers and electronics remains strong with no sign of easing, according to an electronics executive. However, purchasers are dealing with long lead times due to shortages of raw materials and in the labor force. Logistics remains a challenge. Increased costs are being passed to customers, the executive said.
Supplies remain a seller’s market but prices appear to be easing, said Fiore. “Aluminum, basic chemicals, packaging supplies, electrical and electronic components, energy, some plastics and plastic products, freight and steels continue to remain at elevated prices due to some product scarcity, but supply and demand dynamics appear to be moving closer to equilibrium for the first time in many months.” At the very least, the ISM does not expected prices to get worse.
And factories were able to add workers last month: the ISM’s employment index rose 3 percent to 52.9. More than 1.5 million people exited the unemployment rolls last month, Fiore noted. However, until unemployment benefits expire in September – and school starts — skilled workers remain in short supply.
“As we enter the third quarter, all segments of the manufacturing economy are impacted by near record-long raw-material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products,” said Fiore. “Worker absenteeism, short-term shutdowns due to parts shortages and difficulties in filling open positions continue to be issues limiting manufacturing-growth potential.”
Manufacturers remain optimistic, he added. Demand remains high as new orders and new export orders continue to expand. Customers’ inventories remain at low levels while backlog remains high. Consumption also improved in the July with employment returning to expansion after one month of contraction.
Production could expand further if it weren’t for labor and supply constraints, said Fiore. And the impact of the semiconductor shortage is being felt across all manufacturing sectors. “Everything’s in demand—both old and new chips. It impacts anyone that has any level of electronics in their products. And it’s not expected to improve before 2022.”
Last week, Apple reported that semiconductor supply constraints will affect sales of its iPhone and iPad. The shortages aren’t in the high-end processors that Apple builds for its devices but chips for basic functions such as powering mobile displays and decoding audio.
Sales in transportation equipment remains strong but inventories are low as the chip shortage keeps production numbers down, an industry executive told ISM. “We have idled several of our assembly plants to reduce the strain on the chip supply base.”
Semiconductor companies and analysts now forecast a shortage lasting until 2023.