US Manufacturing Activity Ticks Up, Beating Forecasts: ISM

Shipping containers sit on the dock at a container terminal at the Port of Long Beach-Port of Los Angeles complex, in Los Angeles on April 7, 2021. REUTERS/Lucy Nicholson/File Photo

Strong order growth in America’s manufacturing sector pushed the Institute for Supply Management’s (ISM) factory activity gauge above forecasts, though a measure of factory employment fell to a nine-month low as firms reported difficulties hiring workers.

At the same time, while the ISM’s prices paid by manufacturers gauge saw a decline in August, suggesting a softening of inflationary pressures, a separate factory activity report by data firm IHS Markit (pdf) recorded the fastest pace of inflation in the history of its series.

The ISM index of national factory activity rose to 59.9 last month, beating consensus estimates of 58.6 and representing the 15th month in a row of expansion in the U.S. manufacturing sector after its April 2020 contraction.

A reading below 50 suggests activity contracted, while readings above that number reflect expansion.

The ISM’s strong factory print came despite manufacturers reporting continued shortages of labor and raw materials.

“Panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement.

“All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices, and difficulties in transporting products,” Fiore added.

An ISM measure of new orders rose 1.8 percentage points to 66.7 in August, while an orders backlog gauge rose 3.2 percentage points to 68.2.

“Customer order backlog continues to climb because we are unable to raise production rates due to supplier parts and manpower challenges,“ a machinery manufacturing executive told ISM. ”Continue to see price increases with key commodities, and logistics is an ongoing challenge that has no end in sight.”

Inflation

While supply shortages have pushed up prices for both manufacturers and consumers, the ISM prices paid by manufacturers index fell in August to an eight-month low of 79.4 from a reading of 85.7 in July, after hitting a record high of 92.1 in June. This suggests inflationary pressures may be moderating, though they remain high.

“Business is going strong, but raw material prices [are] still under increasing price pressure. Labor is still an issue,” a plastics and rubber products manufacturing executive told ISM.

Offering a contrarian view to the ISM’s inflation measure, the IHS Markit report noted that the pace of inflation in August hit a fresh series high.

“Not only were firms facing difficulties trying to clear outstanding work, they also faced further hikes in supplier costs. The pace of cost inflation exceeded the previous series record amid a pervasive scarcity of inputs,” Sian Jones, senior economist at IHS Markit, said in a statement.

Inflation data released last week by the Commerce Department showed that the Federal Reserve’s preferred inflation measure, the so-called core personal consumption expenditures (PCE) price index, recorded its smallest monthly gain in five months in July. At the same time, in the 12 months through July, the core PCE index vaulted to levels not seen in 30 years, reinforcing the view that inflation remains a key concern.

Employment

Meanwhile, the ISM factory employment gauge fell by 3.9 percentage points to 49.0, putting it into contraction territory and the lowest reading in nine months.

“The new surges of COVID-19 are adding to pandemic-related issues—worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions, and overseas supply chain problems—that continue to limit manufacturing-growth potential,” Fiore said.

IHS Markit also reported a softening in employment growth as businesses struggled to retain staff and find suitable candidates to fill job openings.

The contraction in the employment measures adds to evidence of shortages of available labor. The pandemic has upended the jobs market dynamics, with businesses widely reporting difficulties hiring workers even as 8.7 million people are officially unemployed. American employers posted a record 10.1 million job openings at the end of June.

Lack of affordable child care, pandemic-related retirements, fears of contracting COVID-19, and generous federal pandemic unemployment benefits, have all been blamed for the disconnect.

Some of the labor shortage pressures are likely to ease as federal pandemic unemployment benefits are set to expire on Sept. 6 and schools reopen for in-person learning.

Clouding this outlook is a resurgence in new COVID-19 cases, driven by the Delta variant of the CCP (Chinese Communist Party) virus, which could drive reluctance among some people to return to the labor force.