U.S. Manufacturing Activity Expands for Fourteenth Straight Month

"Supply and demand dynamics appear to be moving closer to equilibrium for the first time in many months."

The U.S. manufacturing sector reached its fourteenth straight month of expansion in July, while supply-chain bottlenecks are showing some early signs of improvement, according to the Institute of Supply Management’s report released August 2nd.

The ISM reports its index of manufacturing activity eased 1.1% to a reading of 59.5%. Despite the minor slowdown, U.S. manufacturing activity remains far into expansion territory, with any reading over 50 indicating expansion. Notably this month, improvements were noted in labor and supplier deliveries, while prices eased off the 42-year high reported in June. 

In July, new orders and production continued to grow rapidly. Meanwhile, backlogs grew, raw materials inventories contracted and both exports and imports grew. The prices paid index, which hit a record high last month, eased back 6.4% in July to a reading of 85.7%. Timothy Fiore, Chair of the ISM committee noted that although many materials remain at elevated prices as shortages persist "supply and demand dynamics appear to be moving closer to equilibrium for the first time in many months."

Employment, which posted a contraction in June, bounced back into expansion territory with a reading of 52.9%. Manufacturers are scrambling to fill open positions, with the most recent report from the Labor Department pegging unfilled manufacturing jobs at 850,000 nationally. 

Optimism among manufacturing executives was strong, though not as strong as in the spring. The ISM registered 13 positive comments for every one negative comment in July. By contrast, 16 positive comments were recorded in June and 36 positive comments recorded in May.

Further Reading: New U.S. Manufacturing Companies Announced in July

Timothy Fiore, Chair of the ISM committee said that survey panelists reported their companies and suppliers are struggling to meet heightened demand. Challenges include “Near record-long material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. Worker absenteeism, short-term shutdowns due to parts shortages and difficulties in filling open positions.”

One executive in the fabricated metals sector reported, “Strong operations, (with) new programs, orders and launches. Continue to have hiring difficulties and are unable to fill production and salaried jobs (due to) a lack of candidates. Raw materials are still in short supply, with longer lead times.”

Seventeen of eighteen industries included in the ISM’s survey reported growth in July, with growth strongest in furniture & related products; printing and related support activities; apparel, leather & allied products; miscellaneous manufacturing, and more.

The ISM listed several commodities in short supply, including many varieties of steel; as well as adhesives; packaging supplies; paper; PVC resin; and electronic components.

Supply shortages were mentioned numerous times by industrial executives in response to the ISM.

Said one executive in the transportation equipment sector, “Strong sales continue, and inventories are low as the chip shortage is keeping production numbers down — we have idled several of our assembly plants to reduce the strain on the chip supply base.”

But supply shortages are not just impacting transportation sector. Another company in the furniture sector reported “Incoming bookings continue to be strong, and economy continues to return. Still struggling with inflation and availability (of materials, labor and freight).”

New Orders Continue Strong

The ISM’s New Order Index eased back 1.1% to a reading of 64.9%-- well above the expansionary line of 50%. July’s reading marks the fourteenth consecutive month of growth in new orders.

Fifteen of eighteen industries reported an increase in new orders for July, led by furniture & related products; computer & electronic products; printing and related support activities; and machinery.

Production Expands

Production continued to surge in July as manufacturers scrambled to keep up with demand. The Production Index registered 58.4%--down 2.4% from June, but still at an elevated level. July represents the fourteenth straight month of growth for manufacturing output.

Sixteen of eighteen industries reported advances in output in July, led by printing and related support activities; chemical products; wood products; and furniture & related products.

Employment Rebounds Back Into Expansion

After falling into contraction last month, the ISM’s employment index rebounded into expansion again, hitting a level of 52.9%, up 3% over June’s reading.

Any contraction in employment in the current climate is likely more to do with labor scarcity than layoffs, as many companies are having a tough time finding skilled workers in the post COVID landscape. The current rebound in employment is a hopeful sign that manufacturing companies are beginning to fill the historic numbers of open positions. 

Many of the comments from respondents addressed labor issues, with one executive in the primary metals industry reporting, “Business levels continue to be very strong, but we also continue to struggle finding employees. We can only fill 75 percent of our order requirements due to the labor shortage.”

Ten of eighteen industries reported employment growth in June, with growth strongest in electrical equipment, appliances & components; plastics & rubber products; furniture & related products; miscellaneous manufacturing; fabricated metal products.

Another in nonmetallic mineral products reported “Sales are above last year by a good percentage, but meeting demand is just not possible due to force majeure situations, logistics, and labor shortages. We don’t anticipate this ending until well into 2022.”

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