September manufacturing output stays on a growth track, reports ISM

September manufacturing output continued to move in the right direction, 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 61.1 (a reading of 50 or higher indicates growth), increasing 1.2% from August’s 59.9 reading. This represented the 16th consecutive month of growth, at a faster rate, coupled with September also representing the 16th consecutive month of growth for the overall economy. The September PMI is 0.7% above the PMI’s 12-month average, at 60.4, with March’s 64.7 being the high point and November 2020’s 57.7 being the low point.

ISM reported that 17 of the 18 manufacturing sectors saw gains in September, including: Furniture & Related Products; Petroleum & Coal Products; Machinery; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Chemical Products; Apparel, Leather & Allied Products; Textile Mills; Paper Products; Printing & Related Support Activities; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Fabricated Metal Products; Transportation Equipment; Primary Metals; Nonmetallic Mineral Products; and Plastics & Rubber Products. The only industry reporting a decrease in September compared to August is Wood Products.

ISM also pointed out that the six biggest manufacturing sectors— Petroleum & Coal Products; Computer & Electronic Products; Chemical Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; and Transportation Equipment—saw moderate to strong growth.

The report’s key manufacturing metrics were mixed in September.

New orders, which are commonly referred to as the engine that drives manufacturing, were flat, at 66.7, growing for the 16th consecutive month, with The Aforementioned Six Largest Manufacturing Sectors All Growing. August also marked the 15th consecutive month the reading has topped 60, topping a 14-month streak, from May 2017-June 2018, during the last manufacturing expansion.

Production—at 59.4—was off 0.4% from August, growing, at a slower rate, for the 16th consecutive month, with the top six manufacturing sectors each growing at strong to moderate levels. ISM said that production output continues to be impacted by raw materials being a constraint to growth, with inventories hitting their highest levels in the current cycle, coupled with staffing levels still an obstacle and direct labor turnover and retirements also a factor.

Employment—at 50.2—was up 1.2% over August, returning to growth after a 3.9% August decline, which was preceded by growth in July and a June decline that was preceded by six months of growth.

Other notable metrics included:

• Supplier deliveries—at 73.4 (a reading above 50 indicates contraction)—slowed, at a faster rate, for the 67th consecutive month, following August’s 69.5, with the delivery performance of suppliers to manufacturing organizations again slower in September;
• Backlog of orders—at 64.8—was down 3.4% compared to August and growing, at a slower rate, for the 15th consecutive month;
• Inventories—at 55.6—were up 1.4%, growing, at a faster rate, for the second straight month, and customer inventories—at 30.2—up 5.2% from July, trending too low, at a slower rate, for the 59th consecutive month, with customer inventories, at 31.7, up 1.5% compared to August, slowing for the 60th consecutive month and at historically low levels for the 14th consecutive month; and
• Prices are up 1.8%, to 81.2, increasing, at a faster rate, for the 16th consecutive month

Comments from ISM member respondents in the report reflected many on the ongoing manufacturing challenges that have been seen over the last several months, including supply chain issues, labor retention challenges, and rising costs, among others.

“In the U.S., labor availability is the most significant supply challenge for our company, with raw materials just behind,” said a Transportation Equipment respondent. “Plastic resin, polyurethanes, small-volume steel purchases and electronics are the biggest material challenges.”

And a Food, Beverage & Tobacco Products respondent observed that the Lack of labor and escalating costs from every direction are very concerning.

Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee said in an interview that the September PMI reading beat the consensus estimate by 1.6%.

“This is a very positive [PMI], especially with new orders, production, and employment strong,” he said. “But what is moving this number up is the constraints on the input side (supplier deliveries, inventories, and imports). This is not bad at all. It just shows that we are backed up.”

September represented what Fiore described as a little bit of a reversal in the softening in September compared to August, with the supplier delivery number declining for four consecutive months and now is back up, as well as prices also up and reversing that trend, too.

“September is a big manufacturing month and maybe that had a lot to do with it,” he said. “And with 7 million more people joining the labor force…and coming off of unemployment, I think we are going to see an improvement on the labor side, most likely in November and some in October. It is a glimmer of hope.”

When asked about how the myriad supply chain issues—including port congestion, labor, and delivery delays—are impacting manufacturing output, Fiore explained it is unprecedented.

“Everyone I talk to says they have never seen anything like this,” he said. “It really is incredible. We are now of the belief that this is going to continue into the first half of 2022. I am calling it a ‘triple play,’ with extended lead times, an increase in shortages, and an increase in prices. This is a supply manager’s biggest nightmare but also their biggest ability to perform.” 

As for how things could play out for the remainder of 2022, Fiore said that the PMI could remain in the 58-to-62 range. And he added that by December, there could be an elevated shift for both the Supplier Deliveries and Employment numbers.

“I also think the production number should be in the mid-60s, given all the new order levels coming and if the same backlogs still exist, with low customer inventory levels, it could hit 70,” he said. “I am hoping that happens sometime between December and February, and, if we see that shift, it becomes a lot more balanced.”