Manufacturing index slipped in November, but remains in growth territory: ISM

Economic activity in the manufacturing sector grew in November, with the overall economy notching a seventh consecutive month of growth, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

The November Manufacturing PMI registered 57.5 percent, down 1.8 percentage points from the October reading of 59.3 percent. This figure indicates expansion in the overall economy for the seventh month in a row after a contraction in April, which ended a period of 131 consecutive months of growth.

“The manufacturing economy continued its recovery in November. 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 will likely limit future manufacturing growth potential,” Timothy R. Fiore, chair of the Institute for Supply Management Manufacturing Business Survey committee says. “Panel sentiment, however, is optimistic (2.5 positive comments for every cautious comment), an improvement compared to October.”

Breaking down the PMI:

• The New Orders Index registered 65.1 percent, down 2.8 percentage points from the October reading of 67.9 percent.
• The Production Index registered 60.8 percent, a decrease of 2.2 percentage points compared to the October reading of 63 percent.
• The Backlog of Orders Index registered 56.9 percent, 1.2 percentage points higher compared to the October reading of 55.7 percent.
• The Employment Index returned to contraction territory at 48.4 percent, 4.8 percentage points down from the October reading of 53.2 percent.
• The Supplier Deliveries Index registered 61.7 percent, up 1.2 percentage points from the October figure of 60.5 percent.
• The Inventories Index registered 51.2 percent, 0.7 percentage point lower than the October reading of 51.9 percent.
• The Prices Index registered 65.4 percent, down 0.1 percentage point compared to the October reading of 65.5 percent.
• The New Export Orders Index registered 57.8 percent, an increase of 2.1 percentage points compared to the October reading of 55.7 percent.
• The Imports Index registered 55.1 percent, a 3-percentage point decrease from the October reading of 58.1 percent.

Demand expanded, with the (1) New Orders Index growing at strong levels, supported by the New Export Orders Index expanding strongly, (2) Customers’ Inventories Index at its lowest figure since June 2010 (35.8 percent), a level considered a positive for future production, and the (3) Backlog of Orders Index expanding at a slightly faster rate compared to the previous three months. 

“The New Orders and Production indexes continued at strong expansion levels. The Supplier Deliveries Index continued to reflect suppliers’ difficulties in maintaining delivery rates due to factory labor safety issues and transportation challenges. Nine of 10 subindexes were positive for the period; a reading of ‘too low’ for Customers’ Inventories is considered a positive for future production,” says Fiore.

Consumption (measured by the Production and Employment indexes) contributed negatively (a combined 7-percentage point decrease) to the Manufacturing PMI calculation, with five of the top six industries continuing with moderate to strong output expansion. The Employment Index contracted after a single month of growth, primarily due to the inability to attract and retain direct labor. 

“Continued strong new-order levels and an expanding backlog indicate potential employment strength for the remainder of the fourth quarter. For the third straight month and with increased frequency, survey panelists’ comments indicate that significantly more companies are hiring or attempting to hire than those reducing labor forces,” says Fiore.

Inputs—expressed as supplier deliveries, inventories and imports—continued to indicate input-driven constraints to production expansion, at higher rates compared to October, as indicated by minimal gains in inventory levels and a softening of imports. Input improvement stalled compared to October and contributed marginally to the Manufacturing PMI calculation. (The Supplier Deliveries and Inventories indexes directly factor into the Manufacturing PMI; the Imports Index does not.) Prices continued to expand at higher rates, reflecting a clear shift to seller pricing power.

he Supplier Deliveries Index reflects the difficulties suppliers continue to experience due to COVID-19 impacts. Supplier constraints are not expected to diminish soon, and supplier labor issues appear to be worsening,” says Fiore. 

Among the six biggest manufacturing industries, five (Fabricated Metal Products; Chemical Products; Computer & Electronic Products; Transportation Equipment; and Food, Beverage & Tobacco Products) registered solid growth in November.

What respondents are saying

• “The resurgence in COVID-19 cases is adding strain on our Tier-1 and Tier-2 suppliers. Multiple suppliers mentioned that finding new people is an issue with the COVID-19 situation. And there is a learning curve for new [supplier] hires, impacting production efficiency at their place.” (Transportation Equipment)
• “Suppliers are still experiencing labor shortages resulting in component constraints. However, we're seeing life from customers, so there's a positive outlook moving into the first quarter of 2021.” (Computer & Electronic Products)
• “We will finish out the fourth quarter very strong. Customers have increased demand and 2021 is expected to continue to grow.” (Fabricated Metal Products)
• “Business continues to be strong, with significant back-orders. Suppliers have struggled to hire people, as we have to support the increased business. We are seeing significant delays in getting parts and material from China through U.S. ports, especially [at the Port of] Long Beach. Material costs continue to hold steady. The national election and continued COVID-19 uncertainty are concerns.” (Machinery)
• “Customer order volumes are very strong, but our suppliers are having issues meeting our orders due to people shortages.” (Plastics & Rubber Products)
• “Production issues for petrochemicals are getting resolved after a very active hurricane season. That is helping balance supply and demand.” (Chemical Products)
• “Our business is booming, as many customers need products ASAP. A great situation.” (Primary Metals)