ISM: Manufacturing Sector Grows in June Despite Raw Material, Labor Shortages

Economic activity in the manufacturing sector grew in June, with the overall economy notching a 13th consecutive month of growth, according to the June 2021 Manufacturing ISM Report on Business from the Institute for Supply Management.

“The June Manufacturing PMI registered 60.6%, a decrease of 0.6 percentage point from the May reading of 61.2%. This figure indicates expansion in the overall economy for the 13th 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%, decreasing one percentage point from the May reading of 67%. The Production Index registered 60.8%, an increase of 2.3 percentage points compared to the May reading of 58.5%. The Prices Index registered 92.1%, up 4.1 percentage points compared to the May figure of 88% and the index’s highest reading since July 1979 (93.1%). The Backlog of Orders Index registered 64.5%, 6.1 percentage points lower than the May reading of 70.6% The Employment Index registered 49.9%, one percentage point lower compared to the May reading of 50.9%. The Supplier Deliveries Index registered 75.1%, down 3.7 percentage points from the May figure of 78.8%. The Inventories Index registered 51.1%, 0.3 percentage point higher than the May reading of 50.8%. The New Export Orders Index registered 56.2%, an increase of 0.8 percentage point compared to the May reading of 55.4%. The Imports Index registered 61%, a seven-percentage point increase from the May reading of 54%.

“Business survey committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw material 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 parts shortages and difficulties in filling open positions continue to be issues that limit manufacturing growth potential. Optimistic panel sentiment remained strong, with 16 positive comments for every cautious comment. Demand expanded, with the (1) New Orders Index growing, supported by the New Export Orders Index continuing to expand; (2) Customers’ Inventories Index continuing at very low levels; and (3) Backlog of Orders Index continuing at a very high level. Consumption (measured by the Production and Employment indexes) improved in the period, posting a combined 1.3-percentage point increase to the Manufacturing PMI calculation. The Employment Index, which held back further expansion, contracted after six straight months of expansion as panelists continued to note significant difficulties in attracting and retaining labor at their companies’ and suppliers’ facilities. Inputs — expressed as supplier deliveries, inventories and imports — continued to support input-driven constraints to production expansion, at higher rates compared to May, due to continued trouble in supplier deliveries. The Prices Index expanded for the 13th consecutive month, indicating continued supplier pricing power and scarcity of supply chain goods.

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

“Manufacturing performed well for the 13th straight month, with demand, consumption and inputs registering growth compared to May. Panelists’ companies and their supply chains continue to struggle to respond to strong demand due to the difficulty in hiring and retaining direct labor. Continued high backlog levels, too low customers’ inventories and record raw materials lead times are being reported. Labor challenges across the entire value chain continue to be the major obstacles to increasing growth.”

All but one of the 18 manufacturing industries reported growth in June, including transportation equipment, primary metals and machinery. No industries reported a decrease in June.

What Respondents Are Saying

  • “Supply chain constraints, from mechanical to electronics (products), continue to be challenging, from both availability and logistics perspectives. Inflationary pressure on materials due to supply and demand imbalance. Electronic components by far the biggest challenge, with lead times going from 16 weeks to 52-plus weeks. Processors are a critical shortage, leading to us working 24/seven to redesign printed circuit board assemblies to change components. We are extending our PO coverage over 12 months in many cases and committing to non-cancelable, non-returnable (NCNR) terms to assure supply.” (Computer and Electronic Products)
  • “Continue to see very strong demand across all business units. In many cases, we are limited on our ability to supply by raw materials availability. Still running at record volume but could be producing much more. Even if we were able to get all the raw materials needed, we would have capacity issues on many of our production units. Manpower has been a concern.” (Chemical Products)
  • “Strong sales continue and production output is at 100%. COVID-19 restrictions have been mostly lifted. Global chip allocation continues to limit some feature offerings — production schedules have been updated to restrict content affected by the chip shortage.” (Transportation Equipment)
  • “Poultry markets are higher, as demand for chicken has been very strong. Higher costs are starting to be passed along to customers.” (Food, Beverage and Tobacco Products)
  • “No major concerns or activity to report this month. Oil prices have continued to steadily rise, which gives our executive-level management confidence that our capital budgets are set to the correct amounts, and we can proceed with already planned projects without fear that they’ll need to be deferred or canceled due to dynamic oil markets.” (Petroleum and Coal Products)
  • “Demand continues to be strong and customer-ordering patterns are shifting to include long-term demand. Customers are now placing orders for fourth quarter 2021 and first quarter 2022 due to global supply chain issues.” (Fabricated Metal Products)
  • “Other than material availability/volatility and rising prices, the outlook for our company is good. We can’t keep up with the increase in orders and have projects that may require a second shift to be added temporarily, but that might not be possible if material availability — for example, lumber products — remains an issue for us.” (Furniture and Related Products)
  • “Customer demand remains strong. Supply chain issues continue to hamper materials availability and impact production scheduling. Supplier costs continue to rise due to increasing materials, labor and shipping costs.” (Machinery)
  • “Higher prices, inflation and lack of available labor are impacting all organizations in our supply chain.” (Electrical Equipment, Appliances and Components)
  • “Supply disruptions continue, with no end in sight!” (Nonmetallic Mineral Products)
  • “We continue to be oversold based on what we are currently capable of producing. Lack of labor is killing us.” (Primary Metals)

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