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Wednesday, June 2, 2021

Demand is outstripping supply, manufacturing edition

The manufacturing sector continues to boom.

Even as supply can't come close to meeting present demand.

Data from the Institute for Supply Management and IHS Markit released Tuesday both showed the U.S. manufacturing sector continues to grow in spite of ubiquitous supply chain issues that hold the sector back from meeting its full potential during this recovery.

The ISM's headline index registered a reading of 61.2 in May, an increase from April's reading of 60.7 and the 12th straight month the index has indicated expansion in the sector. Any reading for this index above 50 indicates the sector growing faster; readings below indicating contraction.

"The manufacturing economy continued expansion in May," said Timothy Fiore, chair of the ISM's manufacturing business survey committee. "[Panelists] reported that their companies and suppliers continue to struggle to meet increasing levels of demand."

Fiore added that, "Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential." (Emphasis ours.)

The ISM report's supplier deliveries index — which rises as lead times for inputs increase — rose to its highest level since 1974 in May with lead times for production materials reaching a record 85 days, according to Oxford Economics.

"Manufacturing is the economy’s star performer, and all signs point to a solid streak of gains ahead," said Oren Klachkin, lead U.S. economist at Oxford Economics. "Positive fundamental drivers, including robust domestic demand, substantial fiscal stimulus, and recuperating external demand, will keep factories churning out goods at a solid pace. Supply side difficulties will constrain, but not spoil, the manufacturing sector’s expansion."

And whether its chips, or chlorine, or appliances, or single-family homes, just about everything seems to be in short supply right now. Recent data shows that in response to these shortages, prices are on the rise leading to fears the economy will overheat.

But a year removed from the economy's worst quarter on record, flush consumers and confident executives demanding more than the global supply chain can supply ranks quite high on a list of good problems to have.

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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