By Sourcing Journal
This article was published in Sourcing Journal July 2, 2021. We're sharing because it provides overarching context about the impact of Covid-19 in manufacturing markets across the globe.
Global manufacturing continued to be impacted by Covid, with the United States and Eurozone showing strong growth as vaccines helped bring back consumer demand, but continued outbreaks in Asian countries such as China, India and Vietnam curtailed production, according to data analyzed and collected by IHS Markit.
June Purchasing Manufacturers Index (PMI) data from IHS Markit signaled the fastest improvement in the health of the U.S. manufacturing sector on record.
The seasonally adjusted IHS Markit U.S. PMI posted 62.1 in June, unchanged from May. New orders growth remained substantial in June, despite the rate of expansion easing from May’s historic high. The pace of increase was the second-fastest on record, with firms continuing to note marked upturns in demand from new and existing clients.
“June saw surging demand drive another sharp rise in manufacturing output, with both new orders and production growing at some of the fastest rates recorded since the survey began in 2007,” Chris Williamson, chief business economist at IHS Markit, said. “The strength of the upturn continued to be impeded by capacity constraints and shortages of both materials and labor, however, meaning concerns over prices have continued to build. Supplier delivery times lengthened to the greatest extent yet recorded, as suppliers struggled to keep pace with demand and transport delays hindered the availability of inputs. Factories were increasingly prepared, or forced, to pay more to secure sufficient supplies of key raw materials, resulting in the largest jump in costs yet recorded.”
Williamson said strong customer demand in turn meant producers were often able to pass these higher costs on to customers, pushing prices charged for goods up “at a rate unbeaten in at least 14 years.”
“Capacity needs to be boosted and supply chains need to improve to help alleviate some of the inflationary pressures,” he added. “However, companies reported increasing difficulties filling vacancies in June and raising COVID-19 infection waves in Asia threaten to add to supply chain issues.”
New export orders rose solidly in June, but output growth was weighed down by ongoing and severe supply-chain disruptions, and reports of labor shortages.
Although the rate of growth was among the sharpest since May 2007, firms noted difficulties processing new orders amid material delivery delays and challenges finding suitable candidates for current vacancies. Suppliers’ delivery times lengthened to the greatest extent on record in June, as component shortages and transportation issues exacerbated supply-chain woes, causing vendors to raise process.
Input costs rose at the fastest pace since data collection for the series began in May 2007, as greater global demand for inputs put pressure on material shortages. Manufacturers were able to partially pass on higher costs to clients, however, as the rate of charge inflation matched May’s historic peak.
Meanwhile, manufacturing firms indicated a solid rise in employment during June. The rate of job creation was the slowest for six months, however, as companies reported difficulties enticing workers back. Goods producers registered the strongest degree of optimism regarding the outlook for output for seven months. Confidence reportedly stemmed from hopes of a sustained period of strong client demand and more consistent vendor performance going forward.
Growth of the Eurozone manufacturing sector hit new heights during June, with the PMI setting a fresh survey record for a fourth successive month. The PMI improved to a seasonally adjusted 63.4, up from 63.1 in May.
June marked a 12th successive month that the index has posted above the 50 no-change mark that separates growth from contraction, IHS said. In line with recent trends, it was investment goods producers that recorded the strongest growth, followed by intermediate goods, which registered its best PMI reading in the survey history. Consumer goods continued to lag, though growth here was still the sharpest since June 2000.
The Netherlands continued to lead the way in outright PMI numbers, although it and several other nations saw a slight fall in its headline index from May’s record reading. Austria was the second-best performing and set a respective PMI record high for the country in June.
Germany saw a marginal strengthening of its PMI, while Spain and Greece–despite remaining the weakest-performing overall–saw growth rates hit multi-year highs, according to IHS.
Overall production growth in the Eurozone’s manufacturing sector remained elevated during June, edging up slightly since May to a level close to the survey records registered earlier in the year, the report noted. Output continued to increase at especially strong rates in Germany and the Netherlands.
Strong growth in production was again closely linked to positive demand developments, with new orders experiencing their third-fastest ever reported increase in the month. Growth remained broad-based, with new export orders again increasing sharply over the month.
“Eurozone manufacturing continued to grow at a rate unbeaten in almost 24 years of survey history in June, as demand surged with the further relaxation of COVID-19 containment measures and vaccination progress drove renewed optimism about the future,” Chris Williamson, chief business economist at IHS Markit, said. “However, the sheer speed of the recent upsurge in demand has led to a sellers’ market, as capacity and transportation constraints limit the availability of inputs to factories, which have in turn driven industrial prices higher…Manufacturers are clearly willing to pay more to ensure sufficient supplies of key inputs.”
Williamson said there are several survey indicators that indicate the current spike in prices will prove transitory.
“Widespread issues such as port congestion and a lack of shipping containers should soon fade as the initial rebound from the pandemic passes,” he said. “Similarly, recent months have seen safety stock building as companies seek to protect themselves against potential future supply-chain disruptions, which has exacerbated the imbalance of demand and supply in the short-term.”
The Chinese manufacturing sector expanded at a softer pace in June, with firms recording slower increases in output and new orders. Companies indicated that the recent uptick in COVID-19 cases and supply chain difficulties weighed on output, while the pandemic dampened demand both at home and abroad, according to analysis from Caixin Insight Group supplied by IHS Markit.
Input cost inflation eased notably on the month, which led to a slower rise in prices charged. The manufacturing PMI edged down from 52 in May to 51.3 in June. The reading was the lowest recorded in three months.
Firms often linked higher sales to an ongoing improvement in underlying market demand, Caixin noted. However, there were reports that the recent uptick in COVID-19 cases at home and abroad had dampened overall growth. Notably, new export work was broadly stagnant in June.
June data also signaled a slower increase in purchasing activity, which rose modestly overall. The time taken for items to be delivered to manufacturers continued to lengthen solidly, however.
Caixin said companies frequently mentioned that a lack of stock at vendors and logistical delays related to the pandemic had hampered supplier performance. On the employment front, goods producers added to their workforce numbers again in June. Though marginal, the rate of job creation was the second strongest since January 2013.
Inventories of finished goods fell at a “solid and accelerated” rate as firms increased their usage of current stocks to fulfil new orders, Caixin reported. Inflationary pressures meanwhile eased in June. Though sharp, the rate of input price inflation softened to a seven-month low. Higher cost burdens were overwhelmingly linked to greater raw material prices. At the same time, prices charged by manufacturers rose at the slowest rate since February.
“Surveyed enterprises said the resurgence of Covid-19 in Guangdong province and overseas impacted both supply and demand,” Dr. Wang Zhe, senior economist at Caixin Insight Group, said. “Overall, the manufacturing sector continued to stably expand in June, despite the impact of the pandemic. Both demand and supply in the sector remained stable, as did external demand, showing the momentum of economic recovery still remained in the post-epidemic period. Inflationary pressures eased somewhat, but manufacturing enterprises’ purchasing prices and factory-gate prices still rose. The shortage of raw materials continued in some regions. The manufacturing sector has gradually returned to normal. In the second half of this year, the low base effect from last year will weaken. Inflationary pressure, coupled with the economic slowdown, is still a serious challenge for China.”
“The June PMI data show clearly the impact of the latest wave of the COVID-19 pandemic on the Vietnamese manufacturing sector, with company shutdowns in areas facing restrictions leading to sharp reductions in output and new orders across the sector as a whole,” Andrew Harker, economics director at IHS Markit, said.
“Firms responded quickly to a lack of workloads, scaling back their staffing levels and purchasing activity,” Harker added. “While less severe than after the outbreak of the pandemic in early-2020, the reduction in manufacturing output in June was stronger than anything seen prior to COVID-19 since the survey began more than a decade ago. Firms will therefore be hoping for a swift improvement in the health situation and the beginning of a return to more normal operating conditions.”
IHS reported that output and new orders both decreased at the sharpest rates since the first outbreak of the pandemic in early-2020, while firms scaled back their employment and purchasing activity accordingly. The pandemic also impacted supply chains, resulting in a near-record lengthening of delivery times.
The Vietnam Manufacturing PMI dropped sharply to 44.1 in June from 53.1 in May, ending a six-month period of growth. New business from abroad also decreased, as transportation issues and container shortages exacerbated the impacts of the rise in virus cases. These transportation issues, added to material shortages and restrictions linked to the pandemic, led to a marked lengthening of suppliers’ delivery times, the report noted.
Manufacturers in Vietnam responded to falling workloads by cutting back their staffing levels and purchasing activity at the end of the second quarter. Employment decreased for the first time in five months and at a pace that was the second fastest since the survey began in March 2011.
Similarly, purchasing activity fell at the fastest pace since the series nadir seen in April 2020 following the initial outbreak of the pandemic. Falling production and a desire to hold less stock amid declining new orders were behind a reduction in stocks of finished goods.
“There were signs of inflationary pressures easing in June as a lack of demand across the sector led to reduced pricing power,” IHS said. “Although input costs increased at the slowest pace in seven months, the rate of inflation remained above the series average amid reports of material shortages leading to higher prices. Business confidence fell to the lowest since August 2020, reflecting concerns about the ongoing impact of the pandemic. That said, firms remained optimistic overall that output will increase over the coming year.”
India’s manufacturing industry fell back into decline during June, as the intensification of the pandemic and strict containment measures negatively impacted on demand, IHS reported. The latest results highlighted renewed contractions in factory orders, production, exports and quantities of purchases. With business optimism fading over the month, job shedding continued.
Registering 48.1 in June compared to 50.8 in May, the IHS Markit India PMI was below the critical no-change mark of 50 for the first time since July 2020. The stretch of new order growth that started in August 2020 came to an end in June, with firms linking the deterioration in demand to the pandemic.
New export orders decreased for the first time in 10 months. Falling new orders, business closures and the COVID-19 crisis triggered a reduction in output among Indian manufacturers.
Demand weakness and a reduction in production requirements led firms to restrict input purchasing in June, the report said. Backlogs decreased for the second consecutive month in June and data pointed to marked declines in pre- and post-production inventories.
Amid reports of raw material scarcity, transportation issues and COVID-19 restrictions, supplier performance worsened again in June. However, average lead times lengthened slightly.
“The intensification of the COVID-19 crisis in India had a detrimental impact on the manufacturing economy,” Pollyanna De Lima, economics associate director at IHS Markit, said. “Companies became increasingly worried about when the pandemic will end, which resulted in downward revisions to output growth projections. As a result of subdued optimism, jobs were shed again in June. The rate of input cost inflation was stable in June, matching that recorded in May and thereby remaining above its long-run average.”