U.S. factory output increased in November as supply chain pressures eased and manufacturers ramped up production to its highest level in seven months. Employment expanded to a comparable high although hiring remains a challenge.
The Institute for Supply Management’s PMI increased 0.3 percent to 61.1 in November and has been above the expansion benchmark – 50.0 – for 18 months. This underscores the resilience of the U.S. manufacturing sector, said Tim Fiore, chair of the ISM’s manufacturing survey committee, which has grown despite material shortages, price increases, logistics backlogs and other global headwinds.
“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, with some indications of slight labor and supplier delivery improvement,” he said. “All segments of the manufacturing economy are impacted by record-long raw materials and capital equipment lead times, continued shortages of critical lowest-tier materials, high commodity prices and difficulties in transporting products. Coronavirus pandemic-related global issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — continue to limit manufacturing growth potential.”
Demand remains solid: New orders grew 1.7 percent in November to 61.5. Production increased 2.2 percent to 61.5 and employment grew 1.3 percent to 53.3. Factories still have trouble finding workers, said Fiore, as they try to backfill to pre-pandemic staff levels. The rate of retirement has declined, he added, so factories see some progress in the labor market.
The global shortage of semiconductors continues to dog manufacturers. “International component shortages continue to cause delays in completing customer orders,” said a tech executive. “Backlog continues to increase.” A transportation manager noted “large volume drops due to chip shortage,” and an electrical company noted component lead times are still moving out.
Still, the computer and electronics sector lead expansion of the six biggest industries tracked by ISM. New orders and production rebounded from lackluster levels in October. Overall, ISM panelists are commenting on the semiconductor shortage less than they did in prior months while supplies remain constrained. “Sometimes there is just a wear-out factor,” said Fiore.
Overall, prices remain high, but momentum slowed between October and November. ISM’s price index decreased 3.3 percent but remains at an elevated 82.4 percent. Suppliers are retaining pricing power and there’s a scarcity of supply chain goods. The deceleration of the prices index indicates manufacturers have been able to pass on increases in materials and labor costs, said Fiore.
In the electronics sector, “raw materials are up for the suppliers, transportation is up for not only for the suppliers but for [distributors] too, handling and labor costs are up as you have seen those types of things,” Mike Long, CEO of global distributor Arrow Electronics Inc., told analysts on its Q3 earnings call. “So there is a structural change in the business that really hasn’t had an inflationary impact on it for probably 10 years, maybe a little longer. So these costs are real, these costs are permanent and these costs will be charged for, and that’s I think a little different than what we’ve seen in the past. So I don’t expect the pricing to reduce.”
Long explained that prices used to rise and fall based on supply. “In the old days when you had, what we used to call allocation, there was a temporary shortage of products and therefore you could raise your prices. But then when the market changed, they would come right back to where they were. There is no more year-over-year cost reduction on parts like there used to be,” he said. Suppliers are planning price increases for 2022.
Better balance ahead?
There are signs the disparity between supply and demand in the overall manufacturing sector are easing, said Fiore. Supplier deliveries and inventory were both down for November but were offset by growth in new orders and employment. “The supply constraints have been a disproportionate factor in the PMI,” Fiore said. “What manufacturers do in such cases is try to restore balance. With a shift from inputs [supplier deliveries, inventories, and imports] to consumption [production and employment] we made progress.”
Order backlogs decreased by 1.7 percent to 61.9; supplier deliveries were down 3.4 percent to 72.2; and inventories were down 0.2 percent to 56.8. New export orders declined 0.6 percent to 54, and imports increased 3.5 percent to 52.6.
“Demand and consumption registered month-over-month growth in spite of continuing obstacles. Meeting demand remains a challenge due to hiring difficulties and a clear cycle of labor turnover at all tiers,” said Fiore. “Panelists’ comments suggest month-over-month improvement on hiring, offset by backfilling required to address employee turnover. Indications that supplier delivery rates are improving were supported by the supplier deliveries index softening. Transportation networks, a harbinger of future supplier delivery performance, are still performing erratically.”
“It will be interesting to see what the latest strain of coronavirus does,” he added. “Manufacturing is pretty resilient and we have gotten through so far and there’s no reason why that can’t continue.”