Manufacturing sector expands; ‘very persistent pandemic’ causing volatility, report shows

Economic activity in the manufacturing sector increased at a faster rate in December as the overall economy grew for the eighth consecutive month, according to the Institute for Supply Management (ISM). Meanwhile, manufacturing prices jumped to the summer 2018 peak, and labor issues, such as absenteeism and hiring workers, are limiting growth in the sector and are expected to continue until the COVID-19 pandemic ends.

The ISM released Tuesday (Jan. 5) the Manufacturing ISM Report on Business that showed the Purchasing Managers’ Index (PMI) increased by 3.2 percentage points to 60.7% in December, from November. The number indicates that the overall economy expanded, and a PMI above 50% indicates the manufacturing economy is expanding.

The new orders index rose 2.8 percentage points to 67.9% in December. The production index increased by 4 percentage points to 64.8%. The backlog of orders index rose 2.2 percentage points to 59.1%. The employment index increased by 3.1 percentage points to 51.5%. The supplier deliveries index increased by 5.9 percentage points to 67.6%. The inventories index increased by 0.4 percentage points to 51.6%. The prices index increased by 12.2 percentage points to 77.6%. The new export orders index declined by 0.3 percentage points to 57.5%. The imports index declined by 0.5 percentage points to 54.6%.

“The manufacturing economy continued its recovery in December,” 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, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that are limiting manufacturing growth potential. However, panel sentiment remains optimistic, an improvement compared to November.

“Demand expanded, with the new orders index growing at a strong level, supported by the new export orders index expanding, customers’ inventories index remaining in ‘too low’ territory and at a level considered a positive for future production, and the backlog of orders index achieving a 2.5-year high,” Fiore added.

Consumption, which is measured by the production and employment indexes, had a positive impact on the PMI. The production index rose to a 10-year high, said Fiore, noting that the last reading above 64.8% was in January 2011 (65.3%). Five of the top six industries reported moderate to strong expansion, he said. The employment index moved into expansion after one month of contraction amid an inability to attract and retain workers. Inputs, which comprise supplier deliveries, inventories and imports, reflect constraints to production expansion at higher rates than in November as shown by minimal increases in inventory levels and difficulties in expanding imports.

“Supply chains continue to struggle compared to November, contributing moderately to the Manufacturing PMI calculation,” Fiore said. “The prices index jumped dramatically in December to a level last reached in the summer of 2018, the peak of the last manufacturing expansion cycle.”

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

“Manufacturing performed well for the seventh straight month, with demand, consumption and inputs registering strong growth compared to November,” Fiore said. “Labor market difficulties at panelists’ companies are their suppliers will continue to restrict the manufacturing economy expansion until the coronavirus (COVID-19) crisis ends.”

A respondent in the computer and electronic products industry reported a positive impact from the COVID-19 pandemic research support for vaccines and treatments. “While our services are delayed, many customers are not canceling outright, and business picked up for us in the last month — especially in China, where business growth is back on track,” the respondent said.

In the chemical products industry, a respondent reported growth over 2019 while struggling with COVID shutdowns, customer restrictions and personnel issues related to working from home and COVID outbreaks. A respondent in the transportation equipment industry said COVID outbreaks have caused supply chain issues for its suppliers and wanted suppliers to better communicate the issues. However, customer demand for products “is keeping production and future outlook positive,” the respondent said.

A respondent in the food, beverage and tobacco products industry said “COVID-19 is affecting us more strongly now than back in March.” Vendors and suppliers are unable to maintain service levels because of employee shortages. Logistics issues also are affecting the industry as a result of COVID-related problems.

A respondent in the fabricated metal products industry expects a 20% increase in sales in 2021, and the outlook is strong for the first quarter of the year. In the machinery and the miscellaneous manufacturing industries, respondents said sales are exceeding pre-COVID levels but had COVID-related concerns for the winter.

“Business is stronger than expected, with higher demand for many products,” said a respondent in the electrical equipment, appliances and components industry. “Volatility continues due to the very persistent pandemic and associated risks.”