Manufacturing growth remains intact in November, says ISM

Manufacturing growth remained intact in November, for the sixth consecutive month, 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 57.5 (a reading of 50 or higher indicates growth), which was 1.8% below October’s 59.3, while the overall economy expanded for the seventh consecutive month.

While the November PMI reading did not surpass October’s 59.3, which represents the highest PMI reading since September 2018’s 59.3, it was 6% higher than the 12-month average of 51.5 and the second-highest reading during that period.

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

The majority of the report’s key metrics trended down in November.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 2.8%, to 65.1, growing, at a slower rate, for the sixth consecutive month. This followed October’s 67.9, the highest, for any month, going back to January 2004’s 70.6. And the report said that 15 of the 18 manufacturing sectors it tracks saw gains in November.

Production—60.8—was off 2.2%, while growing, at a slower rate, for the sixth consecutive month, topping the 60 mark for the fifth straight month, with five of the top six manufacturing sectors expanding moderately to strongly, according to the report.

Supplier deliveries—at 61.7(a reading above 50 indicates contraction)—slowed from October to November, while slowing, at a faster rate, for the 13th consecutive month, with the report observing that suppliers continue to struggle to deliver and transportation challenges and challenges in supplier labor markets still constraining production growth, which is expected to last until the COVID-19 pandemic is controlled. What’s more, the report pointed out that supplier constraints are not expected to lessen in the near-term, while supplier labor issues are getting worse.

Employment—at 48.4—was down 4.8%, following a month of growth, with eight manufacturing sectors growing in November. And inventories—51.2—was off 0.7% from October, growing, at a slower rate, for the second straight month.

The steady increase in COVID-19 case numbers was prevalent in the comments from ISM members featured in the report.
“The resurgence in COVID-19 cases is adding strain on our Tier-1 and Tier-2 suppliers,” said a Transportation Equipment respondent. “Multiple suppliers mentioned that finding new people is an issue with the COVID-19 situation. And there is a learning curve for new [supplier] hires, impacting production efficiency at their place.”

And a Food, Beverage & Tobacco Products pointed to a lot more COVID-19 hits in factories and is also sending employees home for 14 days to quarantine if they were in close proximity to individuals that tested positive.

“We have had to shut down production lines due to lack of staffing,” the respondent said. “Cost of goods sold [COGS] is much higher than normal due to labor and production inefficiencies.” (Food, Beverage & Tobacco Products).

In an interview, Tim Fiore Chair of the ISM’s Manufacturing Business Survey Committee, said that even with a solid report, manufacturing is up against what he called some alarming things in the moderate term.

“The election is behind us, and we now know what that is going to look like,” he said. The vaccine has been essentially released for approval, and we now have an idea of what the timing is for that. But the problem is the infection rates are at about a 100,000 a day level, and is wreaking havoc on the employment base, which is why you are seeing manufacturing employment levels contracting a little bit and why the supplier deliveries number is up so high [up 1.2%, to 61.7, and slowing at a faster rate for the 13th straight month]. Suppliers have been struggling with this now for quite some time and obviously are not beating it.”

Fiore described the November numbers as having gone from an input-restricted expansion, which is comprised of supplier deliveries, inventories, and imports (which slipped 3.0%, to 55.1, and growing, at a slower rate, for the last five months), to a labor-restricted expansion.

He said this pertains to labor in both the supply base, as well as the transportation sector and ISM panelists numbers, which is supported by seven out of eight panelists trying to hire people instead of firing people. That 7:1 ratio is up from a 4:1 ratio in October, which, he said, is a sign of things getting worse on the labor and employment front.

“I think this is why you saw employment contract,” he said. “It was not because demand disappeared; it was because [manufacturers] cannot hire the people to keep up with the pace. The backlog numbers reinforced that, as they grew. If you go back to July and August, when we started to climb out of this thing, supplier delivery numbers have been very high, and it is simply because suppliers probably have the least amount of resources. They are continuing to struggle and are the last to pay the extra nickel to employees to stay. There are a lot of retention bonuses out there, and lots of people are paying extra money for the direct labor force to work through a certain period. It is not just affecting the consumption side; it is affecting the ability for people to go to work. I think we are deep into that now, and I don’t see the end of it.” 

Despite the challenges in manufacturing amid six months of manufacturing expansion, Fiore noted that November’s PMI marks its second-highest reading over the last 18 months, adding that there is nothing truly “bad” with the November report, with the exception of the employment number.

As an example, of the report’s 10 subindexes, nine were positive in November, he said. And, when looking at those nine, all were basically a stronger positive, except for imports, which were down 3.0%, to 55.1.

“Prices are still expanding, backlog grew, new export orders were up, and new order levels eased down a little bit but were still good, and production was, too,” he said. “Supplier deliveries continue to get worse, and inventory levels expanded but were stable, and customer inventories have been below 40 for four straight months. There is nothing bad about this report. The issue is that the longer there are constraints on labor, not only are you going to drag down the production output, you are going to drive up the backlog. It will hurt the [PMI] number, as labor continues to get more scarce, with inventory remaining around flat or maybe even dropping, because there are not inbound materials to replenish inventory.”