Manufacturing sector expands at faster rate in February; labor shortage persists

Economic activity in the manufacturing sector rose in February, from January, while the overall economy expanded for the ninth consecutive month, according to the Institute for Supply Management (ISM). Meanwhile, labor issues continued to restrict sector production growth.

The ISM released Monday (March 1) the Manufacturing ISM Report on Business that shows the Purchasing Managers’ Index (PMI) rose 2.1 percentage points to 60.8% in February, from January. A reading above 50% indicates the manufacturing economy is expanding.

The new orders index rose 3.7 percentage points to 64.8% in February, from January. The production index increased 2.5 percentage points to 63.2%. The backlog of orders index rose 4.3 percentage points to 64%. The employment index increased 1.8 percentage points to 54.4%. The supplier deliveries index rose 3.8 percentage points to 72%. The inventories index fell 1.1 percentage points to 49.7%. The prices index increased 3.9 percentage points to 86%. The new export orders index increased 2.3 percentage points to 57.2%. The imports index fell 0.7 percentage points to 56.1%.

“The manufacturing economy continued its recovery in February,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “Survey committee members reported that their companies and suppliers continue to operate in reconfigured factories. Issues with absenteeism, short-term shutdowns to sanitize facilities, and difficulties in hiring workers remain challenges and continue to cause strains that limit manufacturing-growth potential.”

Fiore said panel sentiment increased in February, from January. Demand expanded amid increases in the new orders and new export orders indexes, while the customers’ inventories index tied its all-time low of 32.5% and the backlog of orders index rose 4.3 percentage points. Consumption, which is measured by the production and employment indexes, contributed to a 4.3 percentage point increase to the PMI.

“Five of the top six industries reported moderate to strong expansion,” Fiore said. The employment index expanded for the third straight month, but panelists continue to note significant difficulties in attracting and retaining labor at their companies and supplier facilities. Inputs – expressed as supplier deliveries, inventories and imports – continued to indicate input-driven constraints to production expansion, at higher rates compared to January, as indicated by the inventories index returning to contraction territory and another month of slowing supplier delivery performance. Imports marginally slowed in the period, driven by port backlogs. The prices index expanded for the ninth consecutive month, indicating continued supplier pricing power and scarcity of supply chain goods.”

Following five of the six largest manufacturing industries reported strong growth in February: Chemical products; fabricated metal products; transportation equipment; computer and electronic products; and food, beverage and tobacco products. Petroleum and coal products contracted.

“Manufacturing performed well for the ninth straight month, with demand, consumption and inputs registering strong growth compared to January,” Fiore added. “Labor-market difficulties at panelists’ companies and their suppliers continued to restrict manufacturing-economy expansion and will remain the primary headwind to production growth until employment levels and factory operations can return to normal across the entire supply chain.”

A respondent in the computer and electronic products industry said the COVID-19 pandemic has impacted the company’s ability to receive material to build from domestic and overseas third- and fourth-tier suppliers. They have a lack of labor for manufacturing, and this is leading to delivery issues.

“Supply chains are depleted,” said a respondent in the chemical products industry, adding that inventories throughout the supply chain “are empty.” Meanwhile, lead times, prices and demand have risen. The respondent noted the “deep freeze in the Gulf Coast [is] expected to extend [the] duration of shortages.”

In the electrical equipment, appliances and components industry, a respondent said “things are now out of control. Everything is a mess, and we are seeing wide-scale shortages.”

In the wood products industry, a respondent said “prices are rising so rapidly that many are wondering if [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.”

A respondent in the textile mills industry said “a sense of urgency is being felt regarding new orders. Customers are giving an impression that a presence of stability is forthcoming and order flow is increasing.”

In the food, beverage and tobacco products industry, a respondent said “we have experienced a higher rate of delinquent shipments from our ingredient suppliers in the last month. We are still struggling keeping our production lines fully manned. We anticipate a fast and large order surge in the food-service sector as restaurants open back up.”

In the machinery industry, a respondent said prices and lead times are rising. “While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up,” the respondent noted.

A respondent in the fabricated metal products industry said “overall capacities are full across our industry. Logistics times are at record times.” The industry continues to “fight through shipping and increased lead times on both raw materials and finished goods due to the pandemic.”

In the transportation equipment industry, a respondent said steel prices have risen in recent months and have contributed to rising costs from suppliers and on bid proposals for new work. Also, the tariffs and anti-dumping fees/penalties being incurred by international mills and suppliers are being passed on to the industry.

A respondent in the primary metals industry said new orders have risen 40% in the past two months. The company is overloaded with orders and does not have the workers to produce the product on time. Also, a plastics and rubber industry respondent noted labor shortages at suppliers are impacting delivery for material and prices.