Despite declines, manufacturing growth remains strong in January, reports ISM

Even with some declines in a few key metrics, manufacturing activity in January remained strong, 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 58.7 (a reading of 50 or higher indicates growth), which was 1.8% below December’s 60.5, with both the PMI and the overall economy each growing, at a slower rate, for the eighth consecutive month. The January PMI reading is 5.6% above the 12-month average of 53.1.

ISM reported that 16 of the 18 manufacturing sectors it tracks saw growth in January, including: Electrical Equipment, Appliances & Components; Machinery; Primary Metals; Chemical Products; Fabricated Metal Products; Plastics & Rubber Products; Transportation Equipment; Apparel, Leather & Allied Products; Paper Products; Wood Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Furniture & Related Products; Miscellaneous Manufacturing; Textile Mills; and Computer & Electronic Products. And the he two industries that contracted were Printing & Related Support Activities; and Petroleum & Coal Products.

The majority of the report’s key metrics saw declines in January.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 6.4%, to 61.1, growing, at a slower rate, for the eighth straight month, with 13 of the 18 manufacturing sectors reporting growth for the month, including five of the six largest manufacturing sectors (Transportation Equipment; Fabricated Metal Products; Chemical Products; Food, Beverage & Tobacco Products). This followed December’s 67.9 reading, which matched October 2020 reading for the highest, for any month, going back to January 2004’s 70.6.

Production—at 60.7—was off 4% compared to December’s 64.8 (its highest reading since January 2011s 65.3), growing, at a slower rate, for the eighth month in a row, with 12 manufacturing sectors reporting growth for the month. This represented the seventh consecutive month that the reading topped the 60 mark.

Supplier deliveries—at 68.2 (a reading above 50 indicates contraction)— slowed, at a faster rate, for the 59th consecutive month, with the report saying that suppliers are continuing to struggle to deliver, with deliveries slowing at a faster rate compared to December, as transportation challenges and supplier-labor market challenges still constraining production growth.

Employment headed up 0.9%, to 52.6, growing at a slower rate, for the second month in a row, and only one of the top six manufacturing sectors, Chemical Products, growing. ISM said that still-strong new order levels, low customer inventories, and an expanding backlog indicate potential employment strength for the balance of the first quarter.

ISM member respondent comments in the report were mixed, highlighting how COVID-19 continues to impact manufacturing operations and output.

“Supplier factory capacity is well utilized,” said a Computer & Electronic Products respondent. “Increased demand, labor constraints and upstream supply delays are pushing lead times. This is more prevalent with international than U.S.-based suppliers.” And a miscellaneous manufacturing respondent noted that his company has seen an increase in employees testing positive for COVID-19, which has had a negative impact on operations.

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said that even with some sequential declines in some key metrics, from December to January, the overall manufacturing outlook remains on solid footing.

Addressing the 6.4% New Orders decline, he said that what drove the January reading down that the Computers & Electronics sector softened a bit, and also Petroleum & Coal products going back into contraction.

“These declines, though were offset by Chemicals expanding, especially with the dollar weaker, so our chemicals should be more attractive overseas,” he said. “Transportation equipment did really well and so did Fabricated Metal Products despite problems with steel acquisition and steel prices. And Food & Beverage came back strong.”

Perhaps the main manufacturing-related concern, according to Fiore, is related to labor constraints. But, in the meantime, he observed that order rates are still strong and Backlog of Orders—up 0.6% to 59.7—grew at a faster rate for the seventh consecutive month, which indicates that the ISM panelists companies’ shelves are empty.

That emptiness was made apparent by the report’s Customers’ Inventories reading off 4.8%, to 33.3, which Fiore said is an indication “that there is nothing on the shelves and not so good for their customers,” even though the labor input and supply input remain in a growth cycle, which is far more favorable than seeing demand disappear.   

When asked how the manufacturing sector has adjusted to the various changes brought about by the pandemic, going back to March 2020, Fiore explained that the sector is still “maxing out,” to a large extent, with the future providing some amount of relief.

“When we get a higher levels of vaccination rates, then we can look at [increased] efficiency on the factory floors again,” he said. “The impression is that over the second half of the year we will start to see that…and that is why the second half will be more profitable and better than the first half, which was projected to be strong. We will continue to struggle through the labor issues, at both our panelists and supplier companies, and there will not be any real relief in sight until large scale vaccinations start to occur in April and May.”

In the meantime, he noted that as the U.S. dollar is weakening, it is supporting high commodity prices, coupled with the expectation that New Export Orders could head up in the coming months.