May 3, 2021

The Institute for Supply Management’s index of conditions in the manufacturing sector fell 4.0 points in April to 60.7 after having jumped 3.9 points in March.  The March level was the highest level for this index since December 1983 so the April drop was from a near-record level in the prior month.  And, as it turns out, the demand components were  strong and the only reason the index is not higher is because of supply constraints.  A level of 60.7 is associated with GDP growth of 5.0%.

The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “Survey Committee Members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials. Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential. Optimistic panel sentiment increased, with 11 positive comments for every cautious comment, compared to an 8-to-1 ratio in March.”

Fiore continued, “Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential. Optimistic panel sentiment increased, with 11 positive comments for every cautious comment, compared to an 8-to-1 ratio in March.”

Comments from respondents included the following:

“The current electronics/semiconductor shortage is having tremendous impacts on lead times and pricing. Additionally, there appears to be a general inflation of prices across most, if not all, supply lines.” (Computer & Electronic Products)

“Upstream producers/suppliers are back online and working towards full rates. Demand is outpacing supply and will continue into the third quarter, when the supply chain is expected to be refilled. Supply/demand should be more balanced in Q3/Q4, but demand will continue as customers run hard to meet their demand and rebuild inventory.” (Chemical Products)

“Continued strong sales; however, we have had to trim some production due to the global chip shortage. Hasn’t affected inventories greatly yet, but a continued decrease will begin to reduce available inventories if we don’t recover chip supply shortly.” (Transportation Equipment)

“Steel prices are crazy high. The normal checks on the domestic steel mills are not functioning — imported steel is distorted by the Section 232 tariffs.” (Fabricated Metal Products)

“It’s getting much more difficult to supply production with materials that are made with copper or steel. Lots of work on the floor, but I am worried about getting the materials to support.” (Electrical Equipment, Appliances & Components)

“Market capacity in most areas is oversold, with no realistic improvement on the horizon. In fact, it appears that demand will continue to strengthen, leading to more significant disruptions.” (Furniture & Related Products)

“In 35 years of purchasing, I’ve never seen everything like these extended lead times and rising prices — from colors, film, corrugate to resins, they’re all up. The only thing plentiful at present, according to my spam filter, is personal protective equipment [PPE].” (Plastics & Rubber Products)

“The metals markets remain very challenging at best. Shortages of raw materials have increased, especially in aluminum and carbon steel. Prices continue to rapidly increase. Transportation and trucking [are] also a big challenge.” (Primary Metals)

It is important to recognize that the overall index is the compilation of a number of different components — production, orders, employment, supplier deliveries, inventories, prices, the backlog of orders, exports, and imports.  In October 16 of the 18 manufacturing industries reported growth.

The orders component fell 3.7 points in April to 64.3 after having risen 3.2 points in March.    The March level was the highest reading for orders since January 2004.  Sixteen of 18 industries reported growth in orders in April.  A reading of 52.8 is generally consistent with an increase in the Census Bureau’s series on manufacturing orders.

The production component fell 5.6 points in April to 62.5 after having jumped 4.9 points in March.  he March level of 68.1 was the highest reading for this component since January 2004 when it was 69.3.   An index of 52.1 is consistent with an increase in the Fed’s index of industrial production.

The delivery performance of suppliers to manufacturing organizations was edged upwards by 1.6 points in March to 75.0 after having eroded by 4.6 points in March.  This means that supplier deliveries are slowing, but they slowed at slower pace  in April than in March.  Suppliers are having a very tough time keeping up with demand.  This is the only component of the ISM report that is reversed, meaning that a reading above 50 indicates slower deliveries.  The supplier deliveries Index continues to reflect supplier difficulties in maintaining delivery rates due to factory labor-safety issues, transportation challenges and increased demand. . A series of snow and ice storms paralyzed the Midwest and Northeast throughout that month which negatively impacted supply chains.

The employment index fell 4.5 points in April to 55.1 after having jumped 5.2 points in March to 59.6 after having risen 1.8 points in February.  March was the highest reading for this category since February 2018 when it was 59.8..  “For the eighth straight month, survey panelists’ comments indicate that significantly more companies are hiring or attempting to hire than those reducing labor forces,” says Fiore

The backlog of orders rose 0.7 points in April to 68.2 after having climbed 3.5 points in March and having jumped 4.3 points in February  A rising backlog is a positive for the future. This is the highest reading since collection of data for this category began in January 1993.  “Backlogs expanded at faster rates in April, indicating ten months of new-order intakes more than fully offsetting production outputs.”

At the same time customer inventory levels continued to fall rapidly.  The index fell 1.2 points in April to 29.4 after having dropped 2.6 points March, 0.6 point in February and 4.8 points in January.  Fiore said that, “Customers’ inventories are too low for the 55th consecutive month, a positive for future production growth. This reading is the lowest ever reported since the subindex was established in January 1997. For nine months in a row, the Customers’ Inventories Index has been at historically low levels,”

As order continue to climb and inventories continue to decline, the ratio or orders to inventories keeps climbing.  Somehow manufacturers need to step up the pace to keep up with customer demand.  The problem is getting the labor force back on the job and still satisfying COVID requirements.

The prices paid component jumped 4.0 points in April to 89.6 after having edged lower by 0.4 point in March, after having climbed 3.9 points in February  . The April  reading was the highest reading for prices since July 2008 (90.4).  All 18 industries reported paying increased prices for raw materials in March. “Aluminum, copper, chemicals, all varieties of steel, plastics, transportation costs, wood and lumber products all continued to record price increases as a result of product scarcity.”  Price growth reflects a power shift toward sellers, as increased costs to produce input materials are being passed on to panelists’ companies.  A prices index above 52.7 is generally consistent with the Bureau of Labor Statistics PPI index for Intermediate Materials.

We expect GDP to climb by11.0% in Q2.  For the year as a whole we expect GDP growth of 8.0%.

Stephen Slifer

NumberNomics

Charleston, S.C.