Strong Demand, Labor and Materials Shortages, and Rising Input Prices Continued for Manufacturing Sector – Robert Hughes (06/02/2021)

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index rose to 61.2 in May, a rise of 0.5 points over the 60.7 percent result in April. May is the 12th consecutive reading above the neutral 50 threshold and fourth consecutive month above 60 (see top of first chart). Over the past 12 months, the Purchasing Managers’ Index has averaged 58.4, the highest since January 2019. The survey results suggest that the manufacturing sector continues to expand at a robust pace.

Among the key components of the Institute for Supply Management’s most recent survey, the New Orders Index came in at 67.0 percent, up 2.7 percentage points from 64.3 percent in April (see top of first chart). The New Orders Index has been above 50 for 12 consecutive months and above 60 for 11 consecutive months. The 12-month average is 64.2, the highest since October 2004. The new export orders index, a separate measure from new orders, rose to 55.4 versus 54.9 in April. The new export orders index has been above 50 for 11 consecutive months.

The Production Index registered a 58.5 percent result in May, down from 62.5 percent in April. The index has been above 50 for 12 consecutive months but has eased back over the last two months. (See bottom of first chart). The 12-month average is 62.0, the highest since October 2018.

The Employment Index fell in May, losing 4.2 percentage points to 50.9 percent in May. The employment index had been one of the weaker components but has now been above 50 for six consecutive months and seven of the past eight months (see bottom of first chart). Many of the respondents in the survey noted labor difficulties with worker absenteeism, and difficulty attracting and retaining workers. The Bureau of Labor Statistics’ Employment Situation report for May is due out on Friday, June 4th. Consensus expectations are for a strong gain of 664,000 nonfarm-payroll jobs including the addition of 25,000 jobs in manufacturing. The unemployment rate is expected to fall to 5.9 percent.

The Backlog-of-Orders Index rose again, coming in at 70.6 percent in May, up from 68.2 percent in the prior month, the highest level since the series began in 1993 (see second chart). The results suggest manufacturer’s backlogs continue to rise.

Customer inventories in May are still considered too low, with the index falling farther below 50 to 28.0 percent versus 28.4 percent in the prior month (index results below 50 indicate customers’ inventories are too low; see second chart). The index has been below 50 for 56 consecutive months and is the lowest since this index began in 1997. Insufficient inventory may be a positive sign for future production.

The prices index, reflecting what manufacturers pay for input materials, eased back slightly in May, dropping 1.6 points to 88.0 from 89.6 in April. Rising input costs reflect shortages of materials, often related to production issues as well as logistical and delivery problems.

Supplier deliveries slowed again in May with the index rising to 78.8 from 75.0 and the highest since April 1974. The Supplier Deliveries Index has been driven higher by difficulties hiring new workers, longer delivery times for raw materials, higher prices for inputs, product shortages, and logistical challenges relating to transportation.

Overall, demand for the manufacturing sector has rebounded more quickly than the ability to meet that demand. It may take some time for supply to catch up with demand, but the period of increased price pressure is unlikely to result in a 1970s-style inflationary spiral.

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