U.S. manufacturing growth held steady in August as employment and new orders gained ground and price pressures eased, indicating inflation has likely reached its peak.
The Institute for Supply Management’s monthly index of factory activity, the PMI, remained level at 52.8 in August. Any number above 50 indicates the sector is expanding.
New orders increased by 3.3 percent to 51.3, and the employment index reached 54.2, up 4.3 percent from July.
In mid-August, the IPC noted similar trends but added “conditions for the electronics supply chain remain challenging, with 86 percent of electronics manufacturers experiencing rising material costs and 76 percent indicating labor costs were increasing.” Supporting data from IPC’s August Economic Report indicate a slowing economy, with an ongoing debate among experts about the possibility of a recession.
ISM panelists also expressed unease about a softening economy, with 18 percent of comments noting concern about order book contraction, said Tim Fiore, chair of the ISM’s manufacturing survey committee. Still, ISM’s prices index declined 7.5 percent to 52.2. “Coupled with lead times easing, [prices] should bring buyers back into the market, improving new order levels,” he said.
Increased employment should help bolster production levels, he added, which slipped by 3.1 percent to 50.4 in August. “I think that’s purely labor driven—factories have needed workers for a long period of time.” Production was additionally constrained by supplier deliveries, inventories and imports, but to a lesser extent than in July.
Companies continued to hire at strong rates in August, with few indications of layoffs, hiring freezes or head-count reductions through attrition. Panelists also reported lower rates of quits to the ISM.
Mixed signals in electronics
August saw important improvements in the inventory-related variables the IPC tracks. Inventory available to customers rose to 102, the first time it has been above the base level of 100 since March 2021. Inventory available from suppliers also increased, up 9 percent to 94. IPC’s outlook calls for continuing improvement in both areas.
The computer and electronics sector grew moderately in August, said the ISM.
At the electronics OEM level, however, there are concerns that component-level inventory is building. “Demand from customers is still strong, but much of that is because there is still fear of not getting product due to constraints. They are stocking up,” a tech executive told the ISM. “There will be a reckoning in the market when the music stops, and everyone’s inventories are bloated.”
Chip companies have scaled back sales expectations for the rest of the year and both fabs and chip makers have reported order cancellations in the past few months. That hasn’t trickled down to the channel where distributors report few cancellations and demand still outstrips supply.
As for the chip shortage? “It depends on who you ask,” said Fiore. Gartner is forecasting a surplus in some component categories early next year. However, OEMs have recently told EPSNews that semiconductor constraints continue. The semiconductor product arena is so broad that both scenarios may be true.
Analog Devices, Taiwan Semiconductor, Renesas and TSMC have reported order cancellations or high levels of inventory in the past few months, noted SeekingAlpha. More cancellations are expected by the end of September. “As lead times continue to decline, a chip shortage may become a chip glut,” according to investment firm Citi. While chip companies rarely discuss excess inventory, customers do, Citi added.
With component lead times exceeding 50 weeks, customers have placed orders to be first-in-line when supplies loosen up. Cancellations mean chips will be available to waiting customers sooner rather than later – a positive development for many OEMs. But if excess inventory begins circulating, chip prices will decline, hurting chip makers.
It remains unclear whether OEMs have stockpiled a significant amount of chips.
“The impact of the chip shortage is slowing, and the decreasing Covid-19 resurgence in Asia is now affecting production more than chips,” a transportation equipment manager told the ISM.
Sentiment remained optimistic regarding demand, the ISM reported, with panelists providing five positive comments for every cautionary note. Twelve percent of panelists’ comments reflect growing worries about total supply chain inventory.
Demand increased, with the new orders expanding, customers’ inventories remaining low and order backlogs increasing.
Consumption (measured by the production and employment indexes) improved during the period. The employment index returned to expansion after three months of contraction. With the gains in hiring and fewer supplier delivery issues, production expansion should improve in September, said Fiore.