The latest survey data from IHS Markit signaled a marked improvement in business conditions across the U.S. manufacturing sector in May. The strong performance reflected sharp expansions in output and new orders. Strong client demand meant operating capacity came under greater strain, with backlogs increasing at the fastest pace since September 2015 and supplier delivery times lengthening to the greatest extent on record. Strong demand for inputs contributed to a sharp rise in purchasing costs, which in turn fed through to a marked rise in output prices.

“The U.S. manufacturing sector enjoyed another bumper month in May, though continues to run hot,” said Chris Williamson, chief business economist at HIS Markit. ““The past two months have seen the strongest back-to-back improvements in order books since the fall of 2014, fueled by strengthening domestic demand. New orders have in fact now grown at a faster rate than output in each of the past five months, highlighting how producers have struggled to boost production to meet sales. In the words of one manufacturer, ‘we’re selling more than we can make.’”

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index (PMI) registered 56.4 in May, down fractionally from 56.5 in April. The reading marked the second-strongest improvement in the health of the sector since September 2014. The upturn was largely driven by sharp increases in production and new business. The greatest lengthening in supplier delivery times since the series began in October 2009 also contributed to the headline figure.

“The upturn has stretched supply chains to the extent that May saw the greatest lengthening of delivery times in the near 10-year history of the survey,” Williamson said. “Producers are also finding it difficult to find suitable staff.”

Factory output continued to increase at a robust pace in May, despite the rate of growth softening slightly. More favorable demand conditions and greater client demand were widely cited as driving the expansion of production.

Reflective of stronger demand conditions, new orders increased sharply in May. Moreover, the rate of growth was the second-fastest since September 2014 (after April 2018). Alongside the acquisition of new clients, panelists also noted that customers were demonstrating a greater propensity to spend. In contrast, new export orders increased only marginally.

As the rate of new business growth continued to outstrip that of output, backlogs rose again in May, increasing at the fastest rate in over two-and-a-half years. As a result, firms added to their payrolls again, with the rate of job creation picking up slightly during the month though failing to match the highs seen earlier in the year.

Meanwhile, price pressures remained elevated. Although rates of both input cost and selling price inflation eased slightly, they were nonetheless the second-fastest since September and June 2011 respectively (both after April 2018). Panelists reported that higher input costs were often due to suppliers being able to hike prices in response to strong demand.

Increased pressure on supply chains led to the greatest deterioration in vendor performance in the series’ history. Consequently, stocks of purchases rose at the quickest pace for four months as firms increased their efforts to create safety stocks.

Finally, business confidence remained robust in May, climbing to the second-highest since February 2015.

“With sales growing faster than production, backlogs of work are accumulating at the fastest rate for nearly four years, which should support further production growth in coming months,” Williamson said. “Business expectations regarding future production in fact picked up again to one of the highest levels seen over the past three years, adding to signs that strong growth will persist through the summer months.”