by Juliet Jeske
May 31, 2021
The Institute for Supply Management’s Report on Business releases details on the U.S. manufacturing sector on Tuesday. Economists predict the manufacturing sector will continue to show strong signs of growth while grappling with shortages and rising prices of raw materials and supplies.
The ISM creates their report by asking managers from sectors of the manufacturing industry if statistics in five categories of their businesses have increased, decreased or stayed the same. Readings above 50% are a sign for growth.
Here are five things to watch for when looking at the ISM report on Tuesday:
Demand will remain strong
In April the ISM registered at 60.7%, which was a slight dip from the 37-year high of 64.7% for March. The ISM has shown expansion in the manufacturing sector for the past 11 months. Americans stuck at home due to the COVID-19 pandemic bought manufactured goods instead of spending on services like dining out or traveling. Personal savings jumped to 27.7% in March only to remain high in April at 14.9% thanks in part by government stimulus checks. The unexpected surge in demand should continue for the immediate future.
For the past several months the ISM report has indicated shortages of raw materials and supplies along with supply chain issues caused by the COVID-19 pandemic. A lack of semiconductor chips is wreaking havoc in the auto industry and could continue well into next year. Industry experts predict automakers could make 1.3 million fewer vehicles this year because of a shortage.
Nearly every sector of manufacturing is also facing difficulty getting raw materials such as aluminum, copper, chemicals and all varieties of steel, plastics, and lumber. When manufacturers can’t get the supplies and raw materials they need it can slow down production which causes delays throughout the supply chain. Many manufacturers make parts for larger big ticket items. If they can’t get the right metal, plastics or resin to make those parts then the larger items will also get delayed.
Price increases and inflation.
In April the ISM Price Index registered 89.6% an increase of 4 percentage points, indicating raw materials price increases for the 11th consecutive month. In the last three months the index has been at its highest level since July 2008. Last month the ISM indicated price increases of raw material in all 18 sectors of manufacturing.
When manufacturers pay more for raw materials and supplies the costs get passed on to consumers. This has caused many to fear the possibility of rising inflation. If inflation spikes it would likely cause the economy to slow down and a rise in unemployment. It would also cut into the purchasing power of consumers. Federal reserve officials have said these price increases are likely temporary and related to the pandemic. Economists remain concerned.
“The Fed wants to stick to it story that this is just a run up and inflation is going to be transitory,” said Michael Englund chief economist, Action Economics. “Obviously, it’s too early for us to say if this is temporary or not. But with every month that passes and as prices continue to rise, it really does raise the question,”
Last month showed growth in employment in the manufacturing sector for the fifth month in a row. The manufacturing industry has over a half a million job openings. Managers have complained that they can’t get enough skilled workers for their factories.
Nearly half of U.S. states have canceled or are about to cancel the extended unemployment benefits. This should ease at least some of the pressure on manufactures but the changes to unemployment benefits are coming too soon to have any affect in the May report.
Expect the unexpected.
The U.S. heads into this holiday weekend with COVID-19 cases down 35% and 51% of adults fully vaccinated for the virus. Since most major cities are just now re-opening leisure and hospitality-based businesses, it will take a while to see the shift in spending from goods to services.
Most manufacturers are just trying to keep up with demand they’ve experienced for the past several months. The April ISM reading for back orders was the highest number since the subindex began in 1993 and the 10th straight month of expansion. Even if all new orders stopped tomorrow it would still take time for companies to catch up with the amount of backorders they have due.
Nearly everything about this recovery is unprecedented and unpredictable.
“This is really a totally different phenomenon than a classic recession and expansion. More like a light switch being turned off and, on my call, you might call it an interruption. We are never going to recover as fast as we did or plunge as fast as we did with something like this,” said Englund.