Economic Activity in Manufacturing Sector Grows in August Amid ‘Unprecedented Obstacles’

Economic activity in the manufacturing sector grew in August, with the overall economy notching a 15th consecutive month of growth, according to the latest Manufacturing ISM Report on Business from the Institute for Supply Management.

“The August Manufacturing PMI registered 59.9%, an increase of 0.4 percentage point from the July reading of 59.5%. This figure indicates expansion in the overall economy for the 15th month in a row after contraction in April 2020,” Timothy R. Fiore, CPSM, CPM, chair of the Institute for Supply Management’s manufacturing business survey committee, said. “The New Orders Index registered 66.7%, increasing 1.8 percentage points from the July reading of 64.9%. The Production Index registered 60%, an increase of 1.6 percentage points compared to the July reading of 58.4%. The Prices Index registered 79.4%, down 6.3 percentage points compared to the July figure of 85.7%. This is its first reading below 80% since December 2020 (77.6%). The Backlog of Orders Index registered 68.2%, 3.2 percentage points higher than the July reading of 65%. The Employment Index indicated contraction at 49%, 3.9 percentage points lower compared to the July reading of 52.9%. The Supplier Deliveries Index registered 69.5%, down three percentage points from the July figure of 72.5%. The Inventories Index registered 54.2%, 5.3 percentage points higher than the July reading of 48.9%. The New Export Orders Index registered 56.6%, an increase of 0.9 percentage point compared to the July reading of 55.7%. The Imports Index registered 54.3%, an 0.6-percentage point increase from the July reading of 53.7%.

“Business Survey Committee panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. The new surges of COVID-19 are adding to pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — that continue to limit manufacturing-growth potential. However, optimistic panel sentiment remained strong, with eight positive comments for every cautious comment.

“Demand expanded, with the (1) New Orders Index growing, supported by continued expansion of the New Export Orders Index; (2) Customers’ Inventories Index remaining at very low levels; and (3) Backlog of Orders Index staying at a very high level. Consumption (measured by the Production and Employment indexes) declined in the period, with a combined 2.3-percentage point decrease to the Manufacturing PMI calculation. The Employment Index returned to contraction after one month of expansion. Hiring difficulties at panelists’ companies were the most significant hurdle to further output in August, as validated by the growth in inventory accounts. Inputs — expressed as supplier deliveries, inventories and imports — continued to support input-driven constraints to production expansion at slower rates compared to July. The Supplier Deliveries Index softened, while the Inventories Index made a strong move into expansion territory due to improvements in raw material deliveries as well as work in progress inventory being held longer due to key part shortages. The Prices Index expanded for the 15th consecutive month, indicating continued supplier pricing power and scarcity of supply chain goods.

“All of the six biggest manufacturing industries — computer and electronic products; fabricated metal products; chemical products; food, beverage and tobacco products; transportation equipment; and petroleum and coal products, in that order — registered moderate to strong growth in August.

“Manufacturing performed well for the 15th straight month, with demand, consumption and inputs registering month-over-month growth in spite of unprecedented obstacles. Panelists’ companies and their supply chains continue to struggle to respond to strong demand due to difficulties in hiring and a clear cycle of labor turnover as workers opt for more attractive job conditions. Disruptions from COVID-19, primarily in Southeast Asia, are having dramatic impacts on many industry sectors. Ports congestion in China continues to be a headwind as transportation networks remain stressed. Demand remains at strong levels despite increased prices for nearly everything.”

The 15 manufacturing industries that reported growth in August included machinery, primary metals and transportation equipment. Textile mills and nonmetallic mineral products were the two industries to report decreases during the month.

What Respondents Are Saying

  • “The chip shortage is impacting supply lines. So far, we’ve been able to manage it without impacting clients.” [Computer and Electronic Products]
  • “Some factories have been impacted by COVID-19 cases. Malaysian government says factories can operate at only 60% of capacity.” [Computer and Electronic Products]
  • “We continue to see extended lead times due to port delays and sea container tightness. Manufacturing capacities are impacted by a lack of workers reducing output. Several chemical facilities have experienced fires, explosions and spills, further challenging suppliers’ ability to deliver on time and in full.” [Chemical Products]
  • “Strong sales continue, but production is limited due to supply issues with chips.” [Transportation Equipment]
  • “Supply chain functions have been relentlessly challenging. All things from freight (both over the road and ocean), already constrained labor forces are further exacerbated by COVID-19 absenteeism. Also, high prices everywhere are wearing our employee base down.” [Food, Beverage and Tobacco Products]
  • “Oil prices have remained higher than planned and is helping to secure capital funds and project sanctions for 2021-22 projects.” [Petroleum and Coal Products]
  • “Bookings/sales continue to be strong. Persistent supply issues — including availability of materials, freight/logistics/containers and allocation of key commodities — continue to hamper production ramp to meet demand. Also struggling with lack of labor in several factories. Commodities are still inflationary, but price increases have leveled.” [Furniture and Related Products]
  • “Business is strong. Part shortages are our largest business constraint. We cannot fulfill orders to customers in reasonable lead times. Now booking out into 2022, and it will get worse as we hit our cyclical high demand in the fourth quarter.” [Electrical Equipment, Appliances and Components]
  • “Business is going strong, but raw material prices still under increasing price pressure. Labor is still an issue.” [Plastics and Rubber Products]
  • “Continue to be unable to hire hourly personnel or machine operators due to few applicants. Steel and aluminum remain in short supply. New business continues to grow and come in. Unable to handle influx of orders without staff, both hourly and salaried.” [Fabricated Metal Products]
  • “Customer order backlog continues to climb because we are unable to raise production rates due to supplier parts and manpower challenges. Continue to see price increases with key commodities, and logistics is an ongoing challenge that has no end in sight.” [Machinery]

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