By Sourcing Journal
This article was published in Sourcing Journal June 2, 2021. It highlights the current challenges constraining U.S. manufacturing output. A similar Reuters analysis focusing on general manufacturing is available here.
A Wall Street Journal article yesterday deemed the Southwest to be "America's new manufacturing hub."
Economic activity in the U.S. manufacturing sector grew in May, the nation’s supply executives said in the latest Manufacturing Institute for Supply Management (ISM) “Report On Business.”
The May Manufacturing Purchasing Managers Index (PMI) registered 61.2 percent, a 0.5 percentage point increase from the April reading of 60.7 percent, according to Timothy R. Fiore, chair of the ISM Manufacturing Business Survey Committee. A Manufacturing PMI above 43.1 percent, over a period of time, generally indicates an expansion of the overall economy.
“The manufacturing economy continued expansion in May,” Fiore said. “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. 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 36 positive comments for every cautious comment, compared to an 11-to-1 ratio in April, Fiore noted. Consumption, measured by the production and employment indexes, indicated slowing expansion, posting a combined 8.2 percent point decrease to the Manufacturing PMI calculation. The report said consumption “was clearly limited due to labor issues and supply constraints, as demand remains very high.”
“Manufacturing performed well for the 12th straight month, with demand, consumption and inputs registering strong growth compared to April,” Fiore said. “Panelists companies and their supply chains continue to struggle to respond to strong demand due to the difficulty in hiring and retaining direct labor. Record backlog, customer inventories and raw material lead times are being reported. The manufacturing recovery has transitioned from first addressing demand headwinds, to now overcoming labor obstacles across the entire value chain.”
Textile mills were among the 16 of 18 manufacturing industries reported growth in May, while apparel and leather producers reported flat growth.
ISM’s New Orders Index registered 67 percent in May, up 2.7 percent from April. This indicates that new orders grew for the 12th consecutive month. A New Orders Index above 52.8 percent is generally consistent with an increase in the Census Bureau’s series on manufacturing orders.
Of the 18 manufacturing industries, the 16 that reported growth in new orders in May included textile mills, while apparel and leather goods were flat.
The Production Index registered 58.5 percent in May, 4 percent lower than the April, indicating growth for 12 straight months. An index above 52.1 percent is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
“The index registered its lowest reading since the full recovery began in June 2020, when it registered 56 percent,” Fiore said. “Lack of direct labor and raw materials were constraints to production growth.”
Textile mills and apparel and leather goods reported production on par with the prior month.
ISM’s Employment Index registered 50.9 percent in May, 4.2 percent lower than April. An Employment Index above 50.6 percent is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
“The Employment Index grew for the sixth month in a row,” Fiore said. “Strong new-order levels, low customer inventories and expanding backlogs continue to indicate employment strength. However, survey panelists’ companies continue to struggle to meet labor-management plans. Panelists’ comments indicate an overwhelming majority of their companies are hiring or attempting to hire, with more than 50 percent of them expressing difficulty in doing so.”
Of the 18 manufacturing industries, nine industries reporting employment growth in May, including textile mills.
The delivery performance of suppliers to manufacturing organizations was slower in May, as the Supplier Deliveries Index registered 78.8 percent. This is 3.8 percent higher than the 75 percent reported in April and the highest reading since April 1974, when the index registered 82.1 percent. A reading below 50 percent indicates faster deliveries, while a reading above 50 percent indicates slower deliveries.
“Supplier labor, materials and transportation constraints are not expected to diminish in the second quarter, putting further strain on panelists’ production plans and raw-materials inventory accounts,” Fiore said. “Production material lead times are at the highest level since January 1987, when we began recording lead times.”
Of the 18 industries, 16 reported slower supplier deliveries in May, led by apparel, leather and allied products, and including textile mills.
The Inventories Index registered 50.8 percent in May, 4.3 percent higher than April. The Inventories Index moved back into growth territory after contracting for one month. An Inventories Index greater than 44.5 percent is generally consistent with expansion in the Bureau of Economic Analysis figures on overall manufacturing inventories.
The eight industries reporting higher inventories in May included textile mills, while apparel, leather and allied products led the seven industries reporting a decrease in inventories.
ISM’s Customers’ Inventories Index registered 28 percent in May, 0.4 percent lower than April, indicating that customers’ inventory levels were considered too low.
“Customers’ inventories are too low for the 56th consecutive month, a positive for future production growth,” Fiore said. “For the third consecutive month, this subindex has registered its lowest reading since it was established in January 1997.”
None of the 18 industries reported higher customers’ inventories in May. The 16 industries reporting customers’ inventories as too low during May included textile mills and apparel, leather and allied products.
The ISM Prices Index registered 88 percent, a decrease of 1.6 percent month to month, indicating raw materials prices increased for the 12th consecutive month. A Prices Index above 52.7 percent is generally consistent with an increase in the BLS Producer Price Index for Intermediate Materials.
“Virtually all basic and intermediate manufacturing materials are experiencing price increases as a result of product scarcity and the dynamics of supply and demand,” Fiore said.
In May, 17 industries reported paying increased prices for raw materials, topped by apparel, leather and allied products, and including textile mills.
ISM’s Backlog of Orders Index registered 70.6 percent in May, a 2.4 percent increase from April, indicating order backlogs expanded for the 11th straight month. May’s reading is the highest since reporting for this subindex began in January 1993.
The 15 industries reporting growth in order backlogs in May were led by apparel, leather and allied products, while textile mills backlog was unchanged from April.
ISM’s New Export Orders Index registered 55.4 percent in May, up 0.5 percent compared to April. Textiles and apparel and leather goods were among the seven industries reporting no change in exports in May as compared to April.
ISM’s Imports Index registered 54 percent in May, up 1.8 percent for the month.
“Imports expanded for the 11th consecutive month, at a faster rate compared to April, reflecting continuing increases in U.S. factory demand and some amount of throughput improvement in ports of entry,” Fiore said. “Overland-transport challenges and container shortages continue to persist across the global supply chain.”
The 11 industries reporting growth in imports in May included textile mills, while apparel and leather were flat.