Manufacturing Sector Continues to Grow Despite Challenges with Meeting Demand

Economic activity in the manufacturing sector grew in July, although at a slower rate than June, with the overall economy notching a 14th consecutive month of growth, according to the Manufacturing ISM Report on Business from the Institute for Supply Management.

“The July Manufacturing PMI registered 59.5%, a decrease of 1.1 percentage points from the June reading of 60.6%. This figure indicates expansion in the overall economy for the 14th 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 64.9%, decreasing 1.1 percentage points from the June reading of 66%. The Production Index registered 58.4%, a decrease of 2.4 percentage points compared to the June reading of 60.8%. The Prices Index registered 85.7%, down 6.4 percentage points compared to the June figure of 92.1%, which was the index’s highest reading since July 1979 (93.1%). The Backlog of Orders Index registered 65%, 0.5 percentage point higher than the June reading of 64.5%. The Employment Index registered 52.9%, three percentage points higher compared to the June reading of 49.9%. The Supplier Deliveries Index registered 72.5%, down 2.6 percentage points from the June figure of 75.1%. The Inventories Index registered 48.9%, 2.2 percentage points lower than the June reading of 51.1%. The New Export Orders Index registered 55.7%, a decrease of 0.5 percentage point compared to the June reading of 56.2%. The Imports Index registered 53.7%, a 7.3-percentage point decrease from the June reading of 61%.”

“Business survey committee panelists reported that their companies and suppliers continue to struggle to meet increasing demand levels. As we enter the third quarter, all segments of the manufacturing economy are impacted by near record-long raw material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. Worker absenteeism, short-term shutdowns due to parts shortages and difficulties in filling open positions continue to be issues limiting manufacturing growth potential.

“Optimistic panel sentiment remained strong, with 13 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) improved in the period, posting a combined 0.6-percentage point increase to the Manufacturing PMI calculation. The Employment Index returned to expansion after one month of contraction; panelists continued to note significant difficulties in attracting and retaining labor at their companies’ and suppliers’ facilities, although there were signs of improvement.

“Inputs — expressed as supplier deliveries, inventories and imports — continued to support input-driven constraints to production expansion at slower rates compared to June, as the Supplier Deliveries Index softened while the Inventories Index contracted, likely due to long lead times. The Prices Index expanded for the 14th 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 July.

“Manufacturing performed well for the 14th straight month, with demand, consumption and inputs registering growth compared to June. Panelists’ companies and their supply chains continue to struggle to respond to strong demand due to difficulties in hiring and retaining direct labor. Comments indicate slight improvements in labor and supplier deliveries offset by continued problems in the transportation sector. High backlog levels, too low customers’ inventories and near-record raw materials lead times continue to be reported. Labor challenges across the entire value chain and transportation inefficiencies are the major obstacles to increasing growth.”

Of the 18 manufacturing industries the ISM tracks, 17 reported growth in July, including machinery, transportation equipment and primary metals. Textile mills was the only industry to report a decrease in July compared with June.

What Respondents Are Saying

  • “Business levels continue to exhibit strong demand with no signs of backing down. Purchases continue to have long lead times due to shortages of raw materials and labor force, as well as logistics challenges. Increased costs are being passed to customers.” (Computer and Electronic Products)
  • “Supply chains are slowly, very slowly, filling up like a water hose, starting upstream and slowly flowing downstream. Rumor is a full return to ‘normal’ may be nearer to year’s end, but the situation is progressing. Transportation (equipment and drivers) is the current pinch point more so than material shortages.” (Chemical Products)
  • “Strong sales continue and inventories are low, as the chip shortage is keeping production numbers down — we have idled several of our assembly plants to reduce the strain on the chip supply base.” (Transportation Equipment)
  • “Still dealing with price increases from force majeure issues as well as overseas shipping premiums and higher costs of items like fuel. Customer demand still high, pushing plant to max production rates.” (Food, Beverage and Tobacco Products)
  • “Strong operations, (with) new programs, orders and launches. Continue to have hiring difficulties and are unable to fill production and salaried jobs (due to) a lack of candidates. Raw materials are still in short supply, with longer lead times.” (Fabricated Metal Products)
  • “Incoming bookings continue to be strong and economy continues to return. Still struggling with inflation and availability (of materials, labor and freight).” (Furniture and Related Products)
  • “Sales are above last year by a good percentage, but meeting demand is just not possible due to force majeure situations, logistics and labor shortages. We don’t anticipate this ending until well into 2022.” (Nonmetallic Mineral Products)
  • “Supply chain continues to be extremely challenging in a variety of categories. Having to place orders months ahead of time just to get a place in line.” (Machinery)
  • “Very busy with new orders. Material costs continue to rise and supplies are sometimes delayed. Labor issues are still affecting us the most with finding proper labor. Labor costs are increasing as we are competing locally for top talent.” (Miscellaneous Manufacturing)
  • “Business levels continue to be very strong, but we also continue to struggle finding employees. We can only fill 75% of our order requirements due to the labor shortage.” (Primary Metals)
Manufacturing at a Glance – July 2021
Index Series Index July Series Index June Percentage Point Change Direction Rate of Change Trend (Months)
Manufacturing PMI 59.5 60.6 -1.1 Growing Slower 14
New Orders 64.9 66.0 -1.1 Growing Slower 14
Production 58.4 60.8 -2.4 Growing Slower 14
Employment 52.9 49.9 3.0 Growing From Contracting 1
Supplier Deliveries 72.5 75.1 -2.6 Slowing Slower 65
Inventories 48.9 51.1 -2.2 Contracting From Growing 1
Customers’ Inventories 25.0 30.8 -5.8 Too Low Faster 58
Prices 85.7 92.1 -6.4 Increasing Slower 14
Backlog of Orders 65.0 64.5 0.5 Growing Faster 13
New Export Orders 55.7 56.2 -0.5 Growing Slower 13
Imports 53.7 61.0 -7.3 Growing Slower 13
Overall Economy Growing Slower 14
Manufacturing Sector Growing Slower 14

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