U.S. manufacturing activity, while still expanding, eased for the third straight month in January as the omicron variant reduced factory staffing levels and supplies remain constrained.
The Institute for Supply Management’s factory index, the PMI, slipped by 1.2 percent in January to 57.6, its lowest level since November 2020. However, any number above 50 indicates industry expansion, and 57.6, “given the uncertainties, is still a good place,” said Tim Fiore, chair of ISM’s manufacturing business survey.
The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labor resources and supplier delivery performance, Fiore added. “Still, there were shortages of critical intermediate materials, difficulties in transporting products and lack of direct labor on factory floors due to the Covid-19 omicron variant.”
The factory employment level moved up 0.6 percent to 53.9 while new orders dropped 3.1 percent to 57.9; production slipped 1.6 percent to 59.4; and prices increased 7.9 percent to 76.1. The decline in new orders and production were likely due to omicron hindering factory operations.
“While there has been some improvement in materials making it to our factories and logistics centers, we are still constrained by [a lack of] qualified labor,” said an electronics industry executive. “Orders so far are not being cancelled, but we are concerned that customers may be losing patience.”
Earnings results demonstrate that manufacturers are still thriving despite ongoing component shortages. Tech giants Apple, Samsung and Intel reported record revenues this past week.
Overall, manufacturing demand expanded in January with new orders slowing but remaining strong. New export orders grew and customer inventories remained low. Order backlogs also slowed but are closer to more normal levels, Fiore said.
Consumption grew at a slower rate, he added, and the employment index showed signs that the ability to hire continues to improve, though somewhat offset by continued challenges of turnover (quits and retirements) and resulting backfilling. Limited expansion strength in production in January, primarily due to absenteeism rates as a result of omicron, was the biggest reason PMI growth was held back.
Inputs — expressed as supplier deliveries, inventories, and imports — continued to constrain production expansion, but there are clear indications of improved delivery performance. Supplier deliveries slowed while inventories expanded—both at a slower rate. However, the prices index expanded for the 20th consecutive month, by 7.9 percent to 76.1, indicating that supplier pricing power continues to rise.
Price hikes are typically announced at the beginning of calendar years, said Fiore. Prices of electrical components, electronic assemblies, electronic components and semiconductors all increased in January and have been in short supply for 12 or more consecutive months. Price increases are being passed on to customers, according to electronics distributor Avnet Inc. during its recent earnings call, and supplies will remain constrained.
“Integrated circuit availability is really causing issues,” said one manufacturer. “Shortages of raw materials and other electronic materials continue to hamper deliveries to our customers.”
Still, manufacturers’ comments in January were more positive than in December, according to the ISM. Employment, the supply chain, shortages and shipments show signs of improvement. The Lunar New Year, Fiore added, might provide some relief to shipping operations as U.S. ports may start to work off their backlogs.
ISM’s data has been seasonally adjusted.