December 1, 2020

The Institute for Supply Management’s index of conditions in the manufacturing sector backtracked by 1.8 points in November to 57.5 after having jumped 3.9 points in October.  The October level was the highest level for this index since September 2018.  And, as it turns out the demand components were extremely strong and the only reason the index is not higher is because of supply constraints.  A level of 57.5 is associated with GDP growth of 4.3%.

The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “The manufacturing economy continued its recovery in November. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that will likely limit future manufacturing growth potential. Panel sentiment, however, is optimistic (2.5 positive comments for every cautious comment).

Comments from respondents included the following:

“Suppliers are still experiencing labor shortages resulting in component constraints. However, we’re seeing life from customers, so there’s a positive outlook moving into the first quarter of 2021.”

“The resurgence in COVID-19 cases is adding strain on our Tier-1 and Tier-2 suppliers. Multiple suppliers mentioned that finding new people is an issue with the COVID-19 situation. And there is a learning curve for new [supplier] hires, impacting production efficiency at their place.”

“We are getting a lot more COVID-19 hits in our factories. We are also sending employees home for 14 days to quarantine if they were in close proximity to individuals that tested positive. We have had to shut down production lines due to lack of staffing. Cost of goods sold [COGS] is much higher than normal due to labor and production inefficiencies.”

“Business continues to be strong, with significant back-orders. Suppliers have struggled to hire people, as we have to support the increased business. We are seeing significant delays in getting parts and material from China through U.S. ports.”

“Customer order volumes are very strong, but our suppliers are having issues meeting our orders due to people shortages.”

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 2.8 points in November to 65.1 after having jumped 7.7 points in October..  The October level is the highest reading since January 2004.  A reading of 52.5 is generally consistent with an increase in the Census Bureau’s series on manufacturing orders.

The production component fell 2.2 points to 60.8 after having risen 2.0 points in October.  It reached a low of 27.5 in April and has risen quickly in the  past seven months.   An index of 51.7 is consistent with an increase in the Fed’s index of industrial production.

The delivery performance of suppliers to manufacturing organizations was slower in November as the supplier deliveries index registered supplier delivery component rose 1.2 points after having climbed 1.5 points in October to 60.5.  This means that supplier deliveries are slowing, and they slowed at a faster pace in November than in October, which is a sign that suppliers are having a 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.  That is typical in the early stages of a recovery as the economy improves and customer demand increases, The high readings for March, April, and May were a product of corona virus related supply interruptions with suppliers impacted by plant shutdowns, transportation challenges, and the continuing difficulty of importing parts and components. In more recent months the supplier deliveries Index continues to reflect supplier difficulties in maintaining delivery rates due to factory labor safety issues and transportation challenges.

The employment index fell 4.8 points to 48.4 after having risen 3.6 points in October.  This series reached a low of 27.5 in April.   Continued strong new-order levels and an expanding backlog signify potential employment strength for the balance of the fourth quarter. For the third 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 1.2 points in November to 56.9 after increasing 0.5 points in October, 0.6 point in September, and  2.8 points in August.  This series reached a low of 37.8 in April.  A rising backlog is a positive for the future. “Backlogs expanded at slightly faster rates in November, indicating that new-order intakes were sufficient to fully offset production outputs and maintain an acceptable level of backlog.  The index achieved its highest reading since August 2018 (57.5),” said Fiore.

.At the same time customer inventory levels fell further.  The index fell 0.4 points in November to 36.3 after having declined 1.2 points in October, 0.2 point in September and 3.5 points in August.  This is the lowest reading for this index since May 2010.  Fiore said that, “Customers’ inventories are too low for the 50th consecutive month and moved further into ‘too low’ territory in November, a positive for future production growth.”  If we take the ratio of orders to customer inventories, it climbed to 1.8 which is basically the highest it has been in a decade.  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 satisfy COVID requirements.

The prices paid component edged lower by 0.1 point in November to 65.4 after having risen 2.7 points in October, 3.3 points in September, and  6.3 points in August.  After reaching a low of 35.3 in April this index has been rising sharply each month since. Price increases were driven primarily by aluminum, copper, steel, transportation costs, corrugate, food products and plastics..   Price growth reflects a power shift toward sellers, as increased costs to produce input materials are being passed on to panelists’ companies,”

Super restrictive measures to halt of the spread of the corona virus caused second quarter GDP to decline 31.4%.  However, the economy rebounded by 33.1% in the third quarter and we believe that will be  followed by a 10.0% increase in Q4.

Stephen Slifer

NumberNomics

Charleston, S.C.