September 1, 2022

The Institute for Supply Management’s index of conditions in the manufacturing sector was unchanged in August at 52.8 after having edged lower by 0.2 point in July and falling 3.1 points in June. The demand components weakened as new orders contracted, customer inventories remained at a very low level, and the backlog decreased but still grew during the month.  Consumption as measured by the production and employment components changed little.  And inputs –  supplier deliveries, inventories and imports —  continued to constrain production but to a much lesser extent in July than in June.    A level of 53.0 is associated with GDP growth of 1.4%.

The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “The U.S. manufacturing sector continues expanding at rates similar to the prior two months. New order rates returned to expansion levels, supplier deliveries remain at appropriate tension levels and prices softened again, reflecting movement toward supply/demand balance. According to Business Survey Committee respondents’ comments, companies continued to hire at strong rates in August, with few indications of layoffs, hiring freezes or head-count reductions through attrition. Panelists reported lower rates of quits, a positive trend. Prices expansion eased dramatically in August, which — when coupled with lead times easing — should bring buyers back into the market, improving new order levels. Sentiment remained optimistic regarding demand, with five positive growth comments for every cautious comment.

Comments from survey respondents include the following:

“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. There will be a reckoning in the market when the music stops, and everyone’s inventories are bloated.” [Computer & Electronic Products]

“Sales in target business softening month-over-month, down 12 percent by revenue. Inventory days are increasing.” [Chemical Products]

“Strong sales continue. The impact of the chip shortage is slowing, and the decreasing COVID-19 resurgence in Asia is now affecting production more than chips.” [Transportation Equipment]

“Supply in most groups is slowly increasing, but demand appears to be outpacing — causing pricing to either stabilize or increase.” [Petroleum & Coal Products]

“Continue to struggle with electronic component shortages. Several smaller machine shops are (manufacturing) the pacing item for our production due to lack of direct labor machinists.” [Machinery]

“Overall, I have seen much improvement in the availability of raw materials. However, trucking issues continued, and production capacity within some industries remains tight. I have growing concerns that as cement and mineral companies run ‘all out’ to meet demand, we will see more downtime due to maintenance (issues).” [Nonmetallic Mineral Products]

“Demand is softening; however, we are continuing to produce to replenish inventory.” [Primary Metals]

“Orders are still strong through the end of the year, but there is a feeling that customers may start pulling back on orders, either cancelling them or pushing them into 2023.” [Plastics & Rubber Products]

“Business conditions are good, and demand is strong. Securing enough raw material supply to keep up is still a challenge.” [Miscellaneous Manufacturing]

The orders component rose 3.3 points in August to 51.3 after having declined 1.1 points in July and 6.0 points in June.  “Of the six largest manufacturing sectors, only two — Computer & Electronic Products and Transportation Equipment — increased new orders at a moderate level. Lead times remained elevated but August saw a decrease across capital expenditures, raw materials and maintenance, repair and operating (MRO) supplies. With prices easing, more buyers should resume order placements as we close the third quarter,”    A reading of 52.9 is generally consistent with an increase in the Census Bureau’s series on manufacturing orders thus durable goods orders could decline in August.

The production component fell 3.1 points in August to 50.4 after declining 1.4 points in July to 53.5 and having risen 0.7 point in June.  Fiore noted that, “Of the top six industries, three — Petroleum & Coal Products; Transportation Equipment; and Machinery — expanded in August. Materials availability and the labor pool continue to recover; with quits easing and supplier deliveries improving, production should expand at a faster rate in September,”    An index above 52.4 is generally associated with an increase in the Fed’s index of industrial production.  Thus, industrial production could decline in August.

The delivery performance of suppliers to manufacturing organizations declined 0.1 point in August to 55.1 after having fallen 2.1 points in July and 8.4 points in June.  This means that supplier deliveries continue to slow in August, but slowed at a slightly slower pace than in July. “This indicates the best supplier deliveries performance since January 2020, prior to the full onset of the coronavirus pandemic, when the index registered 53 percent. Deliveries slowed at a slightly slower rate compared to the previous month — 19.6 percent of panelists reported slower deliveries in August, compared to 21.4 percent in July. Panelists’ comments again indicate that suppliers, despite their labor problems, performed better in August compared to previous months,”  says Fiore.

The employment index rose 4.3 points in August to 54.2 after having risen 3.6 points in July and having fallen 2.3 points in June.   Fiore noted that,  “The index returned to expansion territory after three months of contraction. Of the six big manufacturing sectors, three (Petroleum & Coal Products; Transportation Equipment; and Machinery) expanded. Labor management activity improved in August: A larger share of comments (11 percent in August, up from 7 percent in July) noted greater hiring ease, and among respondents whose companies are hiring, 18 percent expressed difficulty in filling positions, down from 35 percent in July. Turnover rates eased, with 33 percent of comments citing backfill and retirement issues, a decrease from 39 percent in July. Employment gains in August should translate into stronger expansion in production growth in September,” An index reading above 50.5 is generally consistent with an increase in the BLS data on manufacturing employment.

The backlog of orders rose 1.7 points in August to 53.0 after having declined 1.9 points in July and falling 5.5 points in June.  A rising backlog is a positive for the future.  “Backlogs expanded in August at a faster rate as new order levels recovered, and production expanded minimally in the period. A slowing in price increases is a positive for future new orders growth and backlogs expansion,”  says Fiore.

At the same time customer inventory levels continued to fall and they declined at a slightly faster rate in August than in July.  The index fell 0.6 points in August to 38.9 after rising 4.3 points in July and climbing 2.5 points in June.  Fiore said that, “Customers’ inventories are too low for the 71st consecutive month, a positive for future production growth.”

As the orders index rose and the customer inventories index rose, the ratio or orders to inventories was unchanged in August after having fallen 0.2 points in July and0.3 points in June.  Manufacturers  need to maintain  the pace to keep up with customer demand.  The problem is getting the labor force back on the job as well as getting the required materials for production.

The prices paid component declined 7.5 points in July to 52.5 after having plunged 18.5 points in July and 3.7 points in June.  The rate of increase in prices slowed in July.  Fiore noted that, “The slowing in price increases is being driven by (1) relaxation in the energy markets, (2) softening in the copper, steel, aluminum and corrugate markets and (3) continuing sluggishness in chemical demand. Notably, 26.7 percent of respondents reported paying lower prices in August, compared to 21.5 percent in July,”  A prices index above 52.6 is generally consistent with the Bureau of Labor Statistics PPI index for Intermediate Materials.

We expect GDP to climb by 1.5% in the third quarter after declining in each of the first two quarters of the year.  We expect GDP growth of 0.1% in 2022.

Stephen Slifer

NumberNomics

Charleston, S.C.