U.S. manufacturing activity expanded in May as underlying demand for goods remained strong and supply and pricing pressures eased. Labor remained constrained, however, hindering further expansion in production.
The Institute for Supply Management’s factory index, the PMI, grew to 56.1 percent in May from April’s level of 55.4. Any number above 50 indicates the manufacturing sector is expanding. New orders also increased for the month – by 1.6 percent – to a level of 55.1.
Some economists had forecast a slowdown in manufacturing activity following softening in April.
“There was some concern about the [PMI] index moderating in April,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “Backlog came down and inventory went up, which could signal a slowdown in demand. That’s all been reversed in May.”
Customer inventories dropped by 4.4 percent to 32.7 in May and manufacturers’ order backlogs grew 2.7 percent to 58.7 — both good signs for future production. May’s production index grew by 0.6 percent to reach a level of 54.2. There’s also been some easing in pricing and deliveries, said Fiore.
“Hiring and material availability continue to show signs of recovery, but factories are still struggling to hit optimum output rates — primarily due to high levels of employee turnover, which is also causing productivity loss on factory floors,” he added.
Semiconductor supplies, at best, remain uneven. “Suppliers are seeing a light at the end of the tunnel for restoration of [semiconductor] component supply,” said a tech executive. “Second-quarter and Q3 supply appears to be loosening.”
“The challenge with semiconductors hasn’t softened; the situation is worsening due to Chinese Covid-19 lockdowns,” said a transportation equipment executive.
Growth in the computer and electronic products sector in May was outpaced only by machinery. All but one of the 18 manufacturing sectors tracked by the ISM expanded last month.
‘We are [sort of] hiring’
An industry-wide labor shortage is still a headwind for the global movement of supplies and production activity on the factory floor. The ISM’s employment index contracted for the first time in roughly a year, decreasing 1.3 percent to 49.6 percent.
“Manufacturers are hiring but are not expanding their labor force,” Fiore explained. “The number of quits was down but those people are leaving and moving to another job. We just can’t get enough people.”
It’s possible that with schools closing there will be some people entering the workforce “but we still have a long way to go,” he added.
Global logistics have also suffered from a labor shortage and are poised for yet another disruption. All eyes are on Shanghai as the manufacturing hub begins reopening after more than a two-month lockdown. The shutdown caused a decrease in available exports, according to cargo marketplace Freightos, and a lot of cargo ships are now waiting to be loaded in Shenzhen and Shanghai.
Manufacturers lately have been unable determine exactly where their materials are, said Fiore. U.S. imports contracted in May, he added, and there have been problems with deliveries that never showed up.
Once ships have been loaded in China, they’ll arrive in the U.S. just as longshoremen are set to negotiate labor contracts.
Concerns are growing about the impact of a possible surge of ocean containers to already-congested destination ports, Freightos reported. Congestion has worsened during the lockdown at major European hubs as warehousing and labor shortages have led to container yards clogged with imports.
Overseas partners’ disruptions are beginning to impact U.S. manufacturing, hindering factory output growth, said Fiore. “Ten percent of panelists’ general comments expressed difficulty obtaining material from their Asian partners, which will impact reliable deliveries in the summer months.”
But expansion of the May PMI will likely alleviate fears of a near-term recession, experts said.
“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. Despite the employment index contracting in May, companies improved their progress on addressing moderate-term labor shortages at all tiers of the supply chain,” said Fiore. May was a second straight month of slight easing of prices expansion, but instability in global energy markets continues.
Sentiment among ISM panelists remains strongly optimistic regarding demand. “Panelists continue to note supply chain and pricing issues as their biggest concerns,” he concluded.