Although U.S. manufacturers are expecting a rise in revenue and capital expenditures in 2022, supply chain constraints will get worse, according to supply managers surveyed by the Institute for Supply Management. Employment is expected to improve but at a higher cost – 73 percent of respondents expect labor and benefit costs to grow by an average of 6.7 percent for all of 2022.
Nearly half – 48 percent – of manufacturers anticipate supply problems will get worse 1H 2022; 47 percent expect challenges will remain the same. The past year has been plagued by slower deliveries; higher logistics prices; worker and materials constraints and a chip shortage that will last throughout 2022.
The Electronic Components Industry Association anticipates demand for components will decrease sharply in December although shortages for all categories of devices persist. The fourth quarter is seasonally the weakest of the year, the trade group pointed out, with inflation and market uncertainty contributing to the slowdown. Component makers seem to expect continuing demand in 2022: one distributor reported 100 suppliers have warned of price hikes next year.
Overall, manufacturers’ expectations for 2022 are positive as 65 percent of respondents expect higher revenue. Purchasing executives forecast a 6.5-percent net increase in sales for 2022, compared with a 14.1-percent increase expected this year. Fifteen of 18 manufacturing industries, including computers and electronics, anticipate revenue improvement next year.
“Manufacturing’s purchasing and supply executives expect to see strong growth in 2022,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “They are optimistic about overall business prospects for the first half of 2022, with business continuing to expand through the second half, though at slightly lower rates.”
Manufacturing has expanded for 18 consecutive months with the composite PMI registering above 60 in nine of the last 12 months. Respondents expect raw materials pricing pressure to increase in 2022 — but they also expect slightly higher profit margins.
“Wages and employment will continue high rates of growth as hiring slows. Manufacturers also predict growth in both exports and imports in 2022,” said Fiore in a statement.
Factories are operating at 88.7 percent of their normal capacity, up 0.4 percentage point from May 2021. This increase was achieved through additional personnel; more hours worked; additional plant/equipment and fewer shutdowns. Purchasing and supply executives expect capex to increase by 7.7 percent in 2022 following 12.1 percent rise in 2021.
But costs are also going up next year. Prices paid for raw materials are expected to grow 8.2 in the first half. Employment is forecast to grow by 1 percent in 2022 while labor and benefit cost hikes will average 4.7 percent. So far, most manufacturers – 64 percent — have successfully passed price increases to customers which has enabled the sector to grow despite supply headwinds, according to Fiore.
Manufacturers’ profit margins decreased, on average, during the second and third quarters of 2021: 22 percent experienced an increase; 42 percent had lower margins; and 36 percent reported no change. Expectations are higher between now and May 2022 as 34 percent of respondents forecast better profit margins, 23 percent predict lower profit margins, and 43 percent predict no change.
As of December, 81 percent of manufacturers report difficulty hiring in 2021. Of those, 43 percent increased wages, 35 percent didn’t hire, 12 percent didn’t try to hire and 6 percent lowered their employment standards. Vaccine mandates have not dampened hiring trends: 73 percent of panelists said they weren’t while 27 percent said they were.
Supply chain problems
Sixty percent of respondents to ISM’s Semiannual Forecast survey report the primary source of supply chain disruptions were domestic rather than foreign. This includes issues such as port delays or a lack of truck drivers or domestically produced supplies like steel or aluminum. Of the 40 percent reporting foreign problems, sourcing chips and supplies were the leading cause.
Overall, ISM’s Semiannual Forecast reported:
- Operating rate is currently at 88.7 percent.
- Production capacity increased by 3.5 percent in 2021.
- Production capacity is expected to increase by 6.8 percent in 2022.
- Capital expenditures increased 1 percent in 2021.
- Capital expenditures are expected to increase 7.7 percent in 2022.
- Prices paid increased 14.5 percent in 2021.
- Overall, 2022 prices paid are expected to increase 8.1 percent.
- Labor and benefit costs are expected to increase 4.7 percent in 2022.
- Manufacturing employment is predicted to increase 1.0 percent in 2022.
- U.S. exports growth expected in 2022.
- U.S. imports growth expected in 2022.
- Manufacturing revenues increased 14.1 percent in 2021.
- Manufacturing revenues are expected to increase 6.5 percent in 2022.
- The U.S. dollar is expected to weaken versus six of the seven major trading partner currencies.
- Manufacturing supply managers have an optimistic outlook, with 46 percent of respondents predicting 2022 will be better than 2021.
This year, manufacturing expanded in spite of huge headwinds. The chip shortage became apparent in January and has since affected most manufacturing sectors. A grounded cargo ship in the Suez Canal exacerbated already-sluggish international shipments. Both ocean and freight prices have skyrocketed, U.S. ports remain backlogged and workers hard to find. As of November, materials and components that have been scarce for 10 weeks or more include electronic components, PCBs, semiconductors, silicone and steel. Covid-19, fires and a power shortage have forced factory shut-downs overseas.
“The manufacturing sector is demonstrating its resilience,” said Fiore.