Manufacturing output remains on strong footing in August, reports ISM

August manufacturing activity squeezed out a slight gain over July, according to data issued today by the Institute for Supply Management (ISM).

In its monthly Manufacturing Report on Business, ISM said that the report’s key metric, the PMI, came in at 59.9 (a reading of 50 or higher indicates growth), increasing 0.4% from July’s 59.5 reading. This represented the 15th consecutive month of growth, at a faster rate, coupled with August also representing the 15th consecutive month of growth for the overall economy. The August PMI matched the PMI’s 12-month average, at 59.9, with March’s 64.7 being the high point and September 2020’s 55.7 being the low point.

ISM reported that 15 of the 18 manufacturing sectors saw gains in August, including: Furniture & Related Products; Computer & Electronic Products; Machinery; Primary Metals; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Plastics & Rubber Products; Chemical Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Transportation Equipment; Wood Products; Printing & Related Support Activities; Paper Products; and Petroleum & Coal Products. And it added that the two industries reporting a decrease in August compared to July were Textile Mills; and Nonmetallic Mineral Products.

What’s more, ISM observed that the six biggest manufacturing sectors—Computer & Electronic Products; Fabricated Metal Products; Chemical Products; Food, Beverage & Tobacco Products; Transportation Equipment; and Petroleum & Coal Products, in that order — turned in moderate to strong growth in August.

The report’s key manufacturing metrics were mixed in August.

New orders, which are commonly referred to as the engine that drives manufacturing, headed up 1.8%, to 66.7, growing, at a faster rate, for the 15th consecutive month, with the aforementioned six largest manufacturing sectors all growing. And August marks the 16th consecutive month of new orders readings topping 60, matching a 14-month streak, which occurred during the previous manufacturing expansion that commenced in February 2016.

Production—at 60—was up 1.6% compared to July, also growing, at a faster rate, for the 15th consecutive month, with the top six manufacturing sectors each growing at strong to moderate levels. ISM noted that production continues to be impacted by ongoing hiring issues, with raw materials inventories at their highest level throughout the current cycle. Employment—at 49.0—decreased 3.9%, falling after growing in July and a June decline, which was preceded by six months of growth.

Other notable metrics included:
-Supplier deliveries—at 69.5 (a reading above 50 indicates contraction)—slowed, at a slower rate, for the 66th consecutive month, following July’s 72.5, with the delivery performance of suppliers to manufacturing organizations again slower in August;
-Backlog of orders—at 68.2—was up 3.3% over July and growing, at a faster rate, for the 14th consecutive month;
-Inventories—at 54.2—up 5.3%, growing after a month of contraction that was preceded by two months of expansion, and customer inventories—at 30.2—up 5.2% from July, trending too low, at a slower rate, for the 59th consecutive month, with customer inventories at historically low levels for the last 13 months, which ISM said is a positive for future production growth; and
-Prices down 6.3%, to 79.4, increasing, at a slower rate, for the 15th consecutive month

Comments from ISM member respondents in the report reflected many on the ongoing manufacturing challenges that have been seen over the last several months, including supply chain issues, labor retention challenges, and rising costs, among others.

“The chip shortage is impacting supply lines. So far, we’ve been able to manage it without impacting clients,” said a Computer & Electronic Products respondent.

And a furniture & related products respondent noted that bookings and sales continue to be strong, while also citing how persistent supply issues — including availability of materials, freight/logistics/containers, and allocation of key commodities—continue to hamper production ramp to meet demand. The respondent also said his company is struggling with lack of labor in several factories, with commodities are still inflationary, as price increases have leveled.

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee said the August report was excellent, highlighted by really strong demand.

“New orders remained high, with some of that probably driven by extended lead times,” he said. And new export orders [at 56.6, growing for 14 consecutive months] did not gain by as much as I would have liked but were still strong. Backlog of orders posted its second-highest number ever since the 1990s, and customer inventories are still low. Demand is really good, with some artificial stuff probably in there because of higher prices and extended lead times.”

On the supplier side, Fiore said some gains were made in August, with the supplier deliveries reading down again, with the current reading needing to get down into the low 60s from current levels, to be healthy. And with the decline in prices, for the month, he said it reflects how not as many companies reported price increases compared to June and July.

“The growth in inventories was due, in part, to probably a lot more working processes than normal, with companies building semi-finished product and waiting for one or two more pieces to show up,” he said. “We are seeing that in the manufacturing inventory count, which I usually call raw materials inventory, that accounts for about 70% of total manufacturing inventory. I think that ratio is shifting a little bit. We are going to be battling discrete [inventory] shortages for some time. The big story here is production was 60, but it could have easily been 70. The reason it is not is because we don’t have the employees to do it, as we are slightly contracting again and not keeping up with the pace.”

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