Manufacturing economy grows in March; labor, product shortages remain

Economic activity in the manufacturing sector rose at a faster pace in March as the overall economy grew for the 10^th consecutive month, according to the Institute for Supply Management (ISM). Meanwhile, labor issues and part shortages have limited sector growth.

The ISM released Thursday (April 1) the Manufacturing ISM Report on Business that shows the Manufacturing Purchasing Managers’ Index (PMI) rose 3.9 percentage points to 64.7% in March, from February. An index reading of more than 50% indicates the manufacturing economy is expanding.

The new orders index increased 3.2 percentage points to 68% in March, from February. The production index rose 4.9 percentage points to 68.1%. The backlog of orders index rose 3.5 percentage points to 67.5%. The employment index increased 5.2 percentage points to 67.5%. The supplier deliveries index increased 4.6 percentage points to 76.6%. The inventories index rose 1.1 percentage points to 50.8%. The prices index fell 0.4 percentage points to 85.6%. The new export orders index fell 2.7 percentage points to 54.5%. The imports index rose 0.6 percentage points to 56.7%.

“The manufacturing economy continued its recovery in March,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “However, survey committee members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials. Extended lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are affecting all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential. Optimistic panel sentiment increased, with eight positive comments for every cautious comment, compared to a 5-to-1 ratio in February.

“Demand expanded, with the new orders index growing at a strong level, supported by the new export orders index continuing to expand, customers’ inventories index at an all-time low and backlog of orders index growing to an all-time high,” Fiore added.

Consumption, which is measured by the production and employment indexes, contributed to a 10.1-percentage point increase to the PMI. The employment index rose for the fourth consecutive month, but panelists continued to note difficulties in attracting and retaining employees at their companies’ and suppliers’ facilities, Fiore said. Inputs, which include supplier deliveries, inventories and imports, continued to contribute to input-driven constraints to production expansion and were at higher levels than in February. Inputs contributed to a 5.7-percentage point increase to the PMI. Imports slowed as a result of port backlogs. The prices index rose for the 10^th consecutive month and indicated continued supplier pricing power and scarcity of supply chain goods.

The six largest manufacturing industries reported growth, including computer and electronic products; fabricated metal products; food, beverage and tobacco products; transportation equipment; chemical products; and petroleum and coal products.

“Manufacturing performed well for the 10^th straight month, with demand, consumption and inputs registering strong growth compared to February,” Fiore said. “Labor-market difficulties at panelists’ companies and their suppliers persist. End-user lead times for refilling customers’ inventories are extending due to very high demand and output restrictions as supply chains continue to recover from COVID-19 impacts.”

A respondent in the computer and electronics products industry said the recent winter storms slowed its supply chain but expects to make up for it in the coming month. Orders are expected to increase as consumer confidence rises and the academia market reopens globally, the respondent added.

A chemical products respondent said demand remains strong, but the cold Texas weather impacted the supply of raw materials. A respondent in the plastics and rubber products industry noted “tremendous stress on the supply chain since the winter storm in Texas. Chemicals are on allocations or unavailable. Resin is on allocation and unavailable.” In the food, beverage and tobacco products industry, a respondent said the recent winter storm created a challenge for the supply chain and contributed to broad production interruptions, from plastic substrates to adhesives.

In the transportation equipment industry, a respondent said business conditions are positive but noted constraints related to parts availability and labor challenges. The fabricated metal products and machinery industries also reported labor issues. A respondent in the fabricated metal products industry said it increased pay to retain workers. Also, its raw materials prices have risen 50% to 60% over the past six months and have led to price increases for customers.

A respondent in the petroleum and coal products industry said the “spring and summer months look great for the national oil markets.”

In the electrical equipment, appliances and components industry, a respondent said business is stronger this year, and manufacturing sales are expected to rise. A respondent in the furniture and related products industry said “business bottomed out in February; we are expecting steady improvement through the end of the year. Inflation and material availability, along with logistics, are major concerns.”