March manufacturing output shines, reports ISM

March manufacturing output turned in its strongest performance in years, on multiple fronts, 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 64.7 (a reading of 50 or higher indicates growth), which topped February’s 60.8 by 3.9%. This marked the tenth consecutive of PMI growth, coupled with March representing the tenth consecutive month of growth for the overall economy.

What’s more, this PMI reading is the highest one going back to December 1983, when it posted a 69.9 reading, with the next-highest reading being the 66 recorded in November 1983. March is also the highest PMI reading for the last 12 months, and it is 9.4% above the 12-month average of 55.3.

ISM reported that 17 of the 18 manufacturing sectors it tracks saw growth in March, including: Textile Mills; Electrical Equipment, Appliances & Components; Machinery; Computer & Electronic Products; Apparel, Leather & Allied Products; Furniture & Related Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Primary Metals; Plastics & Rubber Products; Paper Products; Transportation Equipment; Chemical Products; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Printing & Related Support Activities; and Petroleum & Coal Products. No industries reported contraction in March, ISM said.

Each of the report’s key manufacturing metrics saw gains in February.

New orders, which are commonly referred to as the engine that drives manufacturing, increased 3.2%, to 68.0, growing, at a faster rate, for the tenth consecutive month, while posting its highest reading since January 2004’s 70.6. And 15 of the 18 manufacturing sectors reported growth for the month, including five of the six largest manufacturing sectors: Fabricated Metal Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Transportation Equipment; and Chemical Products.

Production—at 68.1—saw a 4.9% increase over February, growing, at a faster rate, for the tenth consecutive month, with 14 sectors reporting growth, and it was the ninth consecutive month that the reading topped the 60 mark. ISM this is the highest monthly reading for production since January 2004’s 69.3. Employment—at 59.8—grew, at a faster rate, for the fourth consecutive month, posting its highest reading since February 2018’s 59.8. Inventories—at 50.8—headed up 1.1%, returning to growth after contracting in February.

Other notable metrics included:
-Supplier deliveries—at 76.6 (a reading above 50 indicates contraction)—slowed, at a faster rate, for the 61st consecutive month, with the report observing that this is the highest reading since April 1974’s 82.1, as suppliers continued to struggle to deliver, as transportation and supplier labor market challenges continued to constrain production growth;
-Backlog of orders—at 67.5—grew 3.5%, rising at a faster rate for the ninth consecutive month, with ISM noting that new order intakes continue to more than fully offset production outputs. This represents the second-highest reading going back to January 1993, when ISM first started tracking this subindex, and the only month with a higher reading was April 2004’s 66.5; and
-Prices up 3.9%, to 86.0, increasing, at a faster rate, for the ninth consecutive month, and marking its highest reading going back to May 2008’s 88.1

ISM member respondent comments in the report highlighted various challenges the sector faced in February, including harsh winter weather in different regions of the country, labor availability and supply chain and logistics challenges.

A plastics & rubber products respondent pointed to tremendous stress on the supply chain since the winter storm in Texas, and a machinery respondent cited widespread supply chain issues, with suppliers “struggling to manage demand and capacity in the face of chronic logistics and labor issues,” with “no end in sight.” 

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee said this was a great report, adding that manufacturing has been setting a lot of records over the last 12 months, but with the caveat that those records had more to do with rate of change, the definition of a V-shaped recovery, the collapse in April and May 2020, and the pullout in July and August 2020.

“This [data for March] is an absolute positive record and is the highest number since the Regan era,” he said. “Demand was a big driver, with new orders at their highest level since January 2004. And March was a month of transition from a supplier-restricted growth profile that was, in some respects, trying to respond to decent demand growth, and, in some parts driven by lead time concerns, to a clear demand-driven expansion restricted by supply chain inputs. I think we would have seen the same results whether we had COVID-19 issues on the factory floors or not. It is a clear rebound.”

When asked if the March numbers could be a sign that manufacturing is overheating, Fiore said that an argument could be made that some of the new order levels are being driven by expanded lead times, as lead times started to get pushed out in the fourth quarter of 2020. And that subsequently led to increasing shortages arising in January and February 2021, which now appears to have transitioned again to extended lead time problems.

“Lead time comments [from ISM members] are growing again, and shortage comments are relaxing, so it seems like we are back into another cycle here, which could be influencing the new order rates,” he said. “New export orders [down 2.7% to 54.5] were not a factor and could be driven by Europe locking down again.”

Looking ahead, as more people continue to get vaccinated and start to spend on the services side of the economy, Fiore said that there is likely to be a six-month overlap between people getting back to more social norms and a softening manufacturing economy.

As an example, he observed that automobile dealers currently do not have a lot of inventory, due to people having more money in their bank accounts and are buying cars. But he also noted that goods demand will not be cut off just because more people are out and spending money on entertainment and meals.

“The inventory will likely start in the September-October timeframe and carry through into March 2022, at which point there may be a bit of a softening,” he said. “We will have to see.”