High-tech manufacturing is expected to grow for the remainder of the year despite continued inflation and geopolitical unrest. Overall, U.S. manufacturing businesses forecast revenue growth of 9.2 percent for 2022, slightly higher than projections at the end of last year.
Few of the challenges faced in 2021 – inflation, materials and component shortages and logistics delays – have abated this year, according to the Institute for Supply Management’s Semiannual Survey. A tight labor market continues to limit manpower in the factory sector which, in turn, constrains production output. But demand remains robust.
Plants are already operating at 87.2 percent of capacity, ISM reports, and that’s expected to increase 5.8 percent throughout the year. Capital expenditures will help that push—capex is forecast to grow by 7.2 percent.
Even with multiple headwinds, the manufacturing sector continues to expand, said Tim Fiore, chair of the ISM’s manufacturing survey committee.
“With an operating rate of 87.2 percent and projected increases in capital expenditures, prices paid for raw materials and employment by the end of 2022, manufacturing continues its comeback from the turmoil of 2020 and 2021,” he said. Sixteen out of 18 sectors tracked by ISM are expecting revenue growth and 13 anticipate hiring this year.
Capex is, of course, much higher for the semiconductor industry — up by 24 percent in 2022 — which is well into its second year of a severe chip shortage. But new fabs won’t come online soon enough to remedy a worsening supply situation.
“Everything’s in trouble right now and it’s not getting better,” said Vern Densler, solutions engineer for components distributor Sourceability. “We know about the issues all the way down to the foundry level. There’s materials, which has worsened with the Russia-Ukraine conflict. There’s been the recent lockdown in China. We were behind [demand] for awhile and now we are even further behind.”
Ukraine is the world’s leading supplier of neon which is used in chip manufacturing. China is a source of critical metals, materials and services used in all electronics.
Roughly 54 percent of ISM respondents expect the supply chain to worsen in Q3 and Q4. About half say the problems come from foreign, rather than domestic, sources.
Materials prices were climbing steeply even before recent supply chain events but they’re set to stabilize, ISM reports. Manufacturers expect to pay 11.1 percent more for raw materials for all of 2022 – they had already increased 11.4 percent as of April. Manufacturers are able to pass on these price increases because demand remains very strong.
The ISM’s monthly index, the PMI, has cooled in recent months but remains well into expansion territory at 55.4 in May. Any reading above 50.0 indicates growth.
The end of Q1 likely affected several manufacturing metrics, Fiore explained. Finished products are shipped out the door and the end of calendar quarters. Manufacturers that had adequate inventory didn’t place new orders, perhaps anticipating a price break.
But the window for downward price adjustments is narrowing this year. Cost and demand signals are changing more frequently than before the pandemic, manufacturers said, and costs are being passed to customers.
Panelists were asked, relative to the pandemic, if they were more likely to pass on increases. They responded:
- Yes, demand is higher now than before the pandemic, so we can (8 percent)
- Yes, our competitors are raising prices, so we can (11 percent)
- Yes, changes in costs are expected to be long term, so we must (38 percent)
- Yes, our margins are tighter now than they were before the pandemic, so we must (21 percent)
- Yes, for another reason (8 percent)
- No (14 percent)
Employment in the manufacturing sector is forecast to increase by 3.2 percent this year but remains a significant challenge for factories. Labor costs are also on the rise. Eighty-nine percent of manufacturers reported difficulty in hiring as of May. More than half – 56 percent – raised wages to remedy the situation. The employment index has hovered around 50 for most of the past 18 months.
Russia’s invasion of Ukraine has not had a major impact across all U.S. manufacturing industries. When asked about disruption, responses were:
- Yes, it’s very disruptive (5 percent)
- Yes, it’s disruptive (15 percent)
- Yes, it’s somewhat disruptive (40 percent)
- No, it’s not disruptive (40 percent)
Sentiment in the manufacturing sector was consistent with the April’s PMI report where positive comments outweighed negative, Fiore said.