For 16 months the U.S. manufacturing sector has expanded in spite of – rather than thanks to – the global supply chain. The U.S. PMI in September increased by 1.2 percent to 61.1, according to the Institute for Supply Management. However, concern regarding the semiconductor shortage reached its highest level so far this year, said Tim Fiore, chair of the ISM’s manufacturing survey committee.
“Fifteen percent of negative comments [from our panelists] were chip-related,” he said. “People are now falling into the belief that [the shortage] won’t be resolved until the second half of next year.”
Still, demand for U.S. goods is expanding at a level of 66.7 percent, unchanged from the prior month. Any number above 50 indicates growth. Employment finally moved out of contraction territory in September to 50.2, an increase of 1.2 percent.
ISM’s other indexes were a mixed bag. Manufacturers are fully focused on supply chain issues to respond to demand. Factory production slipped slightly, by 0.6 percent, to 59.4. Supplier deliveries increased by 3.9 percent to 73.4. Factory and customer inventories both increased by more than 1 percent each and prices grew by 1.8 percent to 81.2. New export orders dropped while imports increased slightly.
“Demand is not dropping, but there’s just a lot of confusion out there,” Fiore said.
Companies and suppliers continue to deal with an unprecedented number of hurdles. All segments of the manufacturing economy are impacted by record-long raw materials lead times, continued shortages of critical materials, rising commodities prices and difficulties in transporting products. Electronics has been dealing with the chip shortage since January, but interconnect, passive and electromechanical products are also in short supply.
International seaport backlog directly impacted the electronics sector in September. “Many electronic components and assemblies shortages are showing up due to port issues and a lack of containers,” an electronics industry executive told the ISM. “Problematic, but nothing completely shut down yet.”
Ocean carriers have added significantly more capacity to the transpacific trade lane, according to cargo marketplace Freightos, but operational capacity at ports can’t be increased quite as easily. With ports already overwhelmed, those additional ships are contributing to the climbing number of vessels floating outside the ports of LA/Long Beach and now to a growing backlog off the coasts of Shanghai and Ningbo as well.
The tech sector sagged in September, said Fiore, as production dropped, employment dropped and inventory levels declined. Across other industry sectors inventory levels grew, but not for the right reasons. Work-in-process isn’t moving because of parts shortages and finished goods are being held due to downstream customer issues.
Not reaching potential
Manufacturing potential remains constrained due to the global pandemic, said the ISM. Worker absenteeism, short-term factory shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems are ongoing.
Inputs — expressed as supplier deliveries, inventories, and imports — continued to be constrained at higher rates than August. Supplier deliveries softened while inventory continued to expand. Prices increased, indicating continued supplier pricing power and scarcity of supply chain goods.
“The supplier delivery number went back up; prices went back up; and inventory grew, but not for the right reason,” Fiore said.
However, optimistic panel sentiment remains strong, with three positive growth comments for every cautious comment.
In electronics, component substitutions and product redesign have mitigated some of the shortage problems. Overall, “I think manufacturing continues to expand because businesses have been able to push price increases to the customer and profitability remains strong,” said Fiore.
“Customer demand continues to swell as we prepare for the fourth quarter, and overall growth has been extremely good for the year,” said an equipment, appliances and component executive. “Supply chain concerns are growing beyond electronics and chips into most other commodities. Lead times are extending, shipping lanes are slowing, and we will not see an end to this in 2021.”
There is a level of supply-chain fatigue setting in regarding chip supply. The electronics industry has complained about a lack of visibility for decades and that has extended to other manufacturing sectors.
“The chip issue has a lot to do with what’s going on offshore and nobody really sees what’s happening there,” Fiore said. “Not every business gets stories straight from the chip guys. I know of companies that have reached out to chip makers and they don’t take the call. There are wafer and packaging issues and those companies are largely located in Southeast Asia.”
ISM covers 18 manufacturing industries so the level of chip-related concern is notable. However, its list of commodities in short supply and/or up in price continues to expand. Electrical components, electronic components and steel have been in short supply for more than 10 months; everything from adhesives to tires cost more. As long as price hikes can be passed on to customers, said Fiore, manufacturers themselves remain on solid ground.