U.S. manufacturing activity remained robust in January but faced challenges on the labor and supply chain front, according to new data released Monday by the Institute for Supply Management. These challenges are limiting production and driving up prices.
The ISM’s Manufacturing Purchasing Managers’ Index – a key indicator of manufacturing activity – declined to 58.7 in January from 60.5 in December. A reading above 50 indicates expansion in activity and a reading below 50 indicates contraction. While new orders and production growth slowed compared to the prior month, both metrics remained at elevated levels of 61.1 and 60.7, respectively. The index for prices paid for raw materials rose to its highest level since April 2011.
Manufacturing activity continues to help the economy recover but companies are still grappling with disruptions in their labor pool and in their domestic and international supply chains. Some employees may still be unable to return to work. Safety and social distancing-related workflow changes, short-term shutdowns on account of sanitization and other such shop floor changes have impacted production levels and contributed to increasing lead times, affecting producers and suppliers. The ISM indicator for supplier deliveries hit a nine-month high in January, indicating longer delivery times, while the index of order backlogs reached its highest level since June 2018.
Producers, suppliers, shippers, freight forwarders, and commodity producers across the supply chain have experienced supply chain disruptions in the form of parts shortages, higher raw material prices, transportation delays (especially for supplies sourced from overseas) and higher transportation costs. Some companies are incurring higher inventory costs by stocking surplus inventories in anticipation of disruptions. Manufacturing demand is strong because of lean inventory levels, but companies need a smooth flow of product and raw materials in their supply chain to be able to meet that recovering demand.
RSM’s Middle Market Business Index – a survey of middle market companies including manufacturers – in December found that a majority of respondents noted a rise in prices with only some expecting to pass those costs to their customers. While we expect the rise in prices to be temporary, companies will nevertheless experience margin pressures. Companies that have invested in technologies to overcome pandemic-induced labor challenges may potentially reap productivity efficiencies that position them to absorb such pressures.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
