Manufacturing sector growth slows in April; PMI falls 4 points

Economic activity in the manufacturing sector increased at a slower rate in April, while the overall economy grew for the 11^th consecutive month, according to the Institute for Supply Management (ISM). Manufacturing growth potential continues to be limited by labor and parts shortages.

The ISM released Monday (May 3) the Manufacturing ISM Report on Business that shows the Manufacturing Purchasing Managers’ Index (PMI) declined 4 percentage points to 60.7% in April, from 64.7% in March. A reading above 50% indicates the manufacturing economy is growing.

The new orders index fell by 3.7 percentage points to 64.3% in April, from March. The production index declined by 5.6 percentage points to 62.5%. The backlog of orders index rose 0.7 percentage points to 68.2%. The employment index fell 4.5 percentage points to 55.1%. The supplier deliveries index fell 1.6 percentage points to 75%. The inventories index declined by 4.3 percentage points to 46.5%. The prices index rose 4 percentage points to 89.6%. The new export orders index increased 0.4 percentage points to 54.9%. The imports index declined by 4.5 percentage points to 52.2%.

“The manufacturing economy continued expansion in April,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “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. Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect 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 11 positive comments for every cautious comment, compared to an 8-to-1 ratio in March.”

Demand expanded as the new orders index grew and was supported by the new export orders index continuing to rise, the customers’ inventories index fell to another record low, and the backlog of orders index remained at a record-high level, Fiore said. Consumption, which is measured by the production and employment indexes, showed some softening, posting a combined 10.1-percentage point decrease to the PMI. All top six industries reported consumption expansion.

“The employment index expanded for the fifth straight month, but panelists continue to note significant difficulties in attracting and retaining labor at their companies’ and suppliers’ facilities,” Fiore noted. “Inputs — expressed as supplier deliveries, inventories and imports — continued to support input-driven constraints to production expansion, at lower rates compared to March, due to an undesired inventory drawdown.”

Inputs contributed to a 5.9-percentage point decrease to the PMI. Imports slowed as a result of port backlogs. The prices index expanded for the 11^th consecutive month, indicating continued supplier pricing power and a lack of supply chain goods, Fiore added.

The following six largest manufacturing industries reported moderate to strong growth in April: Fabricated metal products; chemical products; food, beverage, and tobacco products; computer and electronic products; transportation equipment; and petroleum and coal products.

“Manufacturing performed well for the 11^th straight month, with demand, consumption and inputs registering strong growth compared to March,” Fiore said. “Labor-market difficulties at panelists’ companies and their suppliers persist. End-user lead times (for refilling customers’ inventories) are extending. This is due to very high demand and output restrictions, as supply chains continue to respond to strong demand amid COVID-19 impacts.”

In the plastics and rubber products industry, a respondent with 35 years of purchasing experience has not seen lead times and rising prices like this. “The only thing plentiful at present, according to my spam filter, is personal protective equipment [PPE],” the respondent added.

A respondent in the computer and electronic products industry said the “electronics/semiconductor shortage is having tremendous impacts on lead times and pricing. Additionally, there appears to be a general inflation of prices across most, if not all, supply lines.”

In the chemical products industry, a respondent said demand is exceeding supply, and this is expected to continue through the third quarter when the supply chain is projected to be refilled. “Supply/demand should be more balanced in Q3/Q4, but demand will continue as customers run hard to meet their demand and rebuild inventory,” the respondent said.

A respondent in the transportation equipment industry reported strong sales but having to cut some production because of the global chip shortage. Inventories have yet to be significantly impacted, but if the chip supply doesn’t recover soon, it’s expected to reduce them.

In the fabricated metal products industry, a respondent said “steel prices are crazy high. The normal checks on the domestic steel mills are not functioning — imported steel is distorted by the Section 232 tariffs.”

A respondent in the furniture and related products industry said market capacity is “oversold” and expects demand to continue to rise, contributing to “more significant disruptions.”