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Manufacturing Sector Sees Strong Demand but Struggles with Labor and Materials Shortages and Rising Input Prices – Robet Hughes (07/06/2021)

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index fell to 60.6 in June, a drop of 0.6 points over the 61.2 percent result in May. June is the 13th consecutive reading above the neutral 50 threshold and fifth consecutive month above 60 (see top of first chart). Over the past 12 months, the Purchasing Managers’ Index has averaged 59.1, the highest since November 2018. 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 66.0 percent, down 1.0 percentage point from 67.0 percent in May (see top of first chart). The New Orders Index has been above 50 for 13 consecutive months and above 60 for 12 consecutive months. The 12-month average is 64.9, the highest since September 2004. The new export orders index, a separate measure from new orders, rose to 56.2 versus 55.4 in May. The new export orders index has been above 50 for 12 consecutive months.

The Production Index registered a 60.8 percent result in June, up from 58.5 percent in May. The index has been above 60 for 11 of the last 12 months. (See top of first chart). The 12-month average is 62.4, the highest since December 2004.

The Employment Index fell in June, losing 1.0 percentage points to 49.9 percent in June. The employment index had been one of the weaker components during the recovery from government-imposed lockdowns but had posted six consecutive months above 50 before the June result (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 June is due out on Friday, July 2nd. Consensus expectations are for a strong gain of 700,000 nonfarm payroll jobs including the addition of 28,000 jobs in manufacturing. The unemployment rate is expected to fall to 5.7 percent.

The Backlog-of-Orders Index eased back from the record-high 70.6 percent in May, coming in at a still-high 64.5 percent for the month (see second chart). The results suggest manufacturer’s backlogs continue to rise but at a somewhat slower pace compared to May.

Customer inventories in June are still considered too low, with the index coming in at 30.8 percent versus 28.0 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 57 consecutive months. Insufficient inventory may be a positive sign for future production.

The net percentage of manufacturers saying that prices for input materials are increasing rose in June, coming in at 84.1 versus 75.9 in May. Rising input costs reflect shortages of materials, often related to production issues as well as logistical and delivery problems. The sharp rise in input costs may squeeze profits at some manufacturers while others may be forced to pass along price increases to customers.

Supplier deliveries slowed again in June though the pace slowing was less than in May as the index declined to 75.1 from 78.8. 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 remains robust but labor difficulties and logistical problems have restrained 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.