Manufacturing ends 2021 with sequential decline but still on a growth track in 2022

While falling sequentially, from November to December, manufacturing output remained on a growth path to finish 2021, 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, was 58.7 (a reading of 50 or higher indicates growth), down 2.4% compared to November. This marks the 19th consecutive month of growth, at a slower rate, coupled with December also representing the 19th consecutive month of growth for the overall economy.      

The 58.7 December PMI marks the lowest reading over the last 12 months, matching January, with March’s 64.7 representing the highest reading.

ISM reported that 15 manufacturing sectors saw gains in December, including: Apparel, Leather & Allied Products; Furniture & Related Products; Textile Mills; Plastics & Rubber Products; Machinery; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Chemical Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Transportation Equipment; Primary Metals; and Petroleum & Coal Products. And the three industries with declines were: Wood Products; Printing & Related Support Activities; and Paper Products.

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

The report’s key metrics were mostly down in December.

New orders, which are commonly referred to as the engine that drives manufacturing, decreased 1.1%, to 60.4, growing, at a slower rate, for the 19th consecutive month, with all six of the largest manufacturing sectors expanding at moderate-to-strong levels compared to November. This also marked the 17th time in the last 18 months, in which new orders topped a reading of 60.

Production—at 59.2—declined 1.1% compared to November, growing, at a slower rate, for the 19th consecutive month, with four of the top six manufacturing sectors, and 10 total, showing growth. ISM said that raw material and labor shortages remain a constraint to production growth, with suppliers continuing to struggle, coupled with panelist sentiment on labor and material shortages heading up, at a low level, for the second straight month.

Employment—at 54.2—eked out a 0.9% increase, to 59.2, growing, at a faster rate, for the fourth consecutive month. ISM said that eight manufacturing sectors reported growth, including three of the six largest sectors, Fabricated Metal Products, Chemical Products, and Computer % Electronic Products. ISM noted that based on its panelists’ comments companies are still struggling to meet labor-management plans, while there were what it called modest signs of progress, for the fourth consecutive month.

Other notable metrics included:

• Supplier deliveries—at 64.9 (a reading above 50 indicates contraction)—slowed, at a slower rate, for the 70th consecutive month, following November’s 72.2 reading, with the delivery performance of suppliers to manufacturing organizations again slower in December;
• Backlog of orders—at 62.8—increased 0.9%, growing, at a faster rate, for the 18th consecutive month;
• Inventories—at 54.7—decreased 2.1%, growing, at a slower rate, for the fifth consecutive month, and customer inventories—at 31.7—rose 6.6, trending too low, at a slower rate, for the 63rd consecutive month; and
• Prices—at 68.2—falling 14.2% compared to November, increasing, at a slower rate, for the 19th consecutive month  

Comments from ISM member panelists in the report reflected many of 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.

“Labor is still tight, and turnover continues. Supply chain issues are is still causing customer order cuts. Trucks are scarce, and the teams are burned out from working long hours and dealing with supply constraints daily,” said a Food, Beverage & Tobacco Products panelist.

And a Miscellaneous Manufacturing panelist said that supply chain interruptions have dramatically increased in the fourth quarter, with many of the company’s suppliers unable to deliver product until January or February 2022 or later. The Omicron variant also received attention, with a Petroleum & Coal Products respondent saying lowered oil prices related to the variant has caused concern around production and capital spend in 2022.   

Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee said in an interview that December’s metrics represent a timing issue, in terms of transitioning between a better balance between inputs (supplier deliveries, inventories, and imports) and outputs, with the supplier delivery number coming down, as well as prices.

“The inventories number came down probably because people wanted to clear inventory to free up cash…in a manufacturing year, and that will probably go back up,” said Fiore. “The employment number creeped up again. The production number is not responding as I had hoped, but primarily because of the timing, I think. When you are getting more materials and things are getting faster, you have adequate inventory and are hiring more people and have plenty of demand, the production number should have climbed but it didn’t. That may mean that in January we may see the production number head up to around 65, and without Omicron the employment number going up to 55 or 55.5, and supplier deliveries getting to the 60 level.”

Fiore added that there are indications that the transportation market is getting better somewhat, but its progress is quelled by the Omicron variant, which he said is going to be “a pretty significant speed bump” for a while, as it will set back the employment number and also increase the supplier deliveries number again and also drive the inventory number up but will not impact new order levels.

“Omicron is a lot more widespread than anything we have dealt with before, which means unplanned (employee) call outs and absenteeism for more than a day,” he said. “This results in parents not being able to go to work, due to unplanned situation. It is happening everywhere.”