U.S. manufacturing activity slowed in October as record-long materials lead times, shipping bottlenecks and component shortages took their toll on factories. The Institute for Supply Management’s PMI dipped 0.3 percent to 60.8. last month although long-term demand signals remain robust.
“New order levels remain expansive and low-customer inventories are positive for future production,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. Although new orders dropped by 6.9 percent to 59.8, any number above 50 indicates manufacturing expansion.
Computers and technology was one of the top-performing sectors for October but still faces an uphill battle for supply. “Global supply chain issues continue,” one tech executive told the ISM. “Getting anything from China is near impossible — extreme delays. Microchip and circuit breaker shortages continue and are expected to continue into 2022.”
Intel Corp. recently extended its chip-shortage forecast to 2023. “We’re in the worst of it now; every quarter next year, we’ll get incrementally better, but they’re not going to have supply-demand balance until 2023,” Intel CEO Pat Gelsinger told CNBC.
Fiore said ISM panel comments pertaining to chips declined from September. “[Factories] are either getting used to it or things have abated somewhat.” Distributors and analysts report the severity of shortages varies from product to product.
The ISM reported 26 commodities were in short supply in October, some for as long as 13 straight months. That compared to 24 in September.
It’s still a seller’s market for everything from chemicals to semiconductors, said Fiore, and prices paid by manufacturers jumped by 4.5 percent to 85.7. The pause in new orders, said Fiore, could indicate buyers expect prices to decline following the holiday season, which lasts through the Chinese New Year. “You already know what your budget is for Q1 2022,” he explained. “Why lock yourself in to prices now — looking farther ahead — when there’s a chance prices may normalize?”
Supply chain intelligence firm Supplyframe paints a grim picture for electronics buyers. Sixty-six percent of the pricing dimensions it measures are set to increase for the first half of 2022. This is occurring as the industry grapples with Delta variant disruptions, expanding Chinese electricity consumption restrictions, massive end-of-life announcements for programmable logic and other devices and prices rising by as much as 100 percent, the firm added.
“Earlier outlooks suggested possible semiconductor and electronics components industry stabilization by mid-2022. But [SupplyFrame’s] latest Commodity IQ report shows that stabilization is now unlikely to begin until the first half of 2023,” said CEO and Founder Steve Flagg. ISM reports price increases have successfully been passed on to customers.
Factory employment levels increased 1.8 percent in October to 52 percent, although manufacturers continue to report high levels of employee turnover and retirement. “Wages have been going up,” said Fiore, “so now people are job-hopping for higher wages. In return, manufacturers that want to retain employees they’ve invested in are raising salaries as well.” Expectations of a surge of workers following the expiration of enhanced benefits hasn’t materialized. Competition for employees is not expected to abate, Fiore added.
Although ocean freight rates declined the last week of October – by 6 percent from Asia to the U.S. — port congestion at LA/Long Beach continues to cause delays and contribute to elevated rates by sapping capacity, according to cargo marketplace Freightos. A lack of space for arriving containers at the ports has emerged as the main choke point, slowing how quickly ships can be unloaded and keeping 79 ships – a new record – waiting in the bay.
Shortages of trucking and warehouse capacity to move containers away are big contributors to the backup. In trucking there’s a shortage of both drivers and chassis, exacerbated by the lack of space at warehouses where empty containers often get stored on chassis when there’s no place to stack them. And to complete the loop, the empty containers are often sitting at warehouses because of a limit on how many empties can be returned to the already-full ports.
ISM manufacturing panelists remain optimistic despite supply chain headwinds with four positive growth comments for every cautious comment in October. Demand expanded, with new and export orders expanding; backlog levels remaining high and customer inventory levels too low.
Inputs — expressed as supplier deliveries, inventories and imports — continued to constrain production expansion, especially with a contraction in imports, compared with September. Factory inventory levels expanded in October work-in-process was held longer due to key part shortages and more finished goods inventory held due to downstream customer issues.
“Demand continues to be strong, but we continue to be held back by supply chain issues — logistics delays, as well as capacity and labor issues at suppliers,” said a manufacturer of electrical equipment.