Manufacturing growth flat in August; price increases ease

The manufacturing sector expanded in August at the same rate it did in July as price growth declined to the lowest level since June 2020, according to the Institute for Supply Management (ISM).

The ISM released Thursday (Sept. 1) the Manufacturing ISM Report on Business which shows the purchasing managers’ index (PMI) was flat at 52.8% in August, from July. A reading above 50% indicates the manufacturing sector is growing.

The report shows new orders, employment, production and backlogs rose in August from July. Supplier deliveries slowed at a slower rate, raw materials inventories grew, and customers’ inventories remained too low. Prices increased at a slower rate, exports fell, and imports rose.

“The U.S. manufacturing sector continues expanding at rates similar to the prior two months,” said Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee. “New order rates returned to expansion levels, supplier deliveries remain at appropriate tension levels and prices softened again, reflecting movement toward supply/demand balance. According to Business Survey Committee respondents’ comments, companies continued to hire at strong rates in August, with few indications of layoffs, hiring freezes or head-count reductions through attrition. Panelists reported lower rates of quits, a positive trend. Prices expansion eased dramatically in August, which — when coupled with lead times easing — should bring buyers back into the market, improving new order levels.”

Also, Fiore said the gains in hiring and a decrease in supply delivery issues should lead production expansion to improve in September.

“Sentiment remained optimistic regarding demand, with five positive growth comments for every cautious comment,” he added. “Panelists continue to express unease about a softening economy, with 18% of comments noting concern about order book contraction. Twelve percent of panelists’ comments reflect growing worries about total supply chain inventory.”

The following manufacturing industries reported moderate-to-strong growth in August: petroleum and coal products, transportation equipment, computer and electronic products, machinery, and food, beverage and tobacco products.

“Manufacturing performed well for the 27^th straight month,” Fiore said. “With supplier delivery performance recording its fourth straight month of improvement, price increase growth slowing significantly for the second consecutive month, hiring and total employment both positive and expanding and lead times easing across all three categories of purchasing activity, the sector is at or approaching supply/demand equilibrium.”

The report included comments from multiple respondents:

In the computer and electronic products industry, a respondent said, “demand from customers is still strong, but much of that is because there is still fear of not getting product due to constraints. They are stocking up. There will be a reckoning in the market when the music stops, and everyone’s inventories are bloated.”

Some respondents noted inventories are rising, including in the chemical products and the food, beverage and tobacco products industries. The chemical products respondent also said sales are softening and declined by 12% in August from the previous month. The respondent in the food, beverage and tobacco products industry added that “inventories are far too high, and we are on pins and needles to see how quickly and at what magnitude our busy season begins. We will start seeing that in the next few weeks.”

Meanwhile, respondents in other manufacturing industries said demand and sales remain strong. In the transportation equipment industry, a respondent said, “strong sales continue. The impact of the chip shortage is slowing, and the decreasing COVID-19 resurgence in Asia is now affecting production more than chips.” A respondent in the petroleum and coal products industry said demand is outpacing supply and leading prices to be stable or to rise.

In the machinery industry, a respondent reported continuing “to struggle with electronic component shortages. Several small machine shops are (manufacturing) the pacing item for our production due to lack of direct labor machinists.”

Other respondents expressed challenges with raw materials sourcing, but a respondent in the nonmetallic mineral products industry said raw materials availability has improved. “However, trucking issues continued, and production capacity within some industries remains tight. I have growing concerns that as cement and mineral companies run ‘all out’ to meet demand, we will see more downtime due to maintenance (issues).” A respondent in miscellaneous manufacturing also reported strong demand and good business conditions but challenges in securing enough raw material supply.

In the primary metals industry, a respondent noted demand was softening but continues to produce to replenish inventory.

“Orders are still strong through the end of the year, but there is a feeling that customers may start pulling back on orders, either canceling them or pushing them into 2023,” said a respondent in the plastics and rubber products industry.