March manufacturing output remains steady despite sequential decline, reports ISM

Even with a mild sequential decline, March manufacturing output remained strong, according to the most recent edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).  

The report’s key metric, the PMI, had a reading of 57.1 (a reading of 50 or higher indicates growth), down 1.5% compared to February’s 58.6, while marking the 22nd consecutive month of growth, at a faster rate, as well as the 22nd consecutive month of overall economic growth.  

March’s PMI reading is 2.6% below the 59.7 average over the last 12 months, with May 2021’s 61.6 marking the high for that period and March’s 57.1 marking the low for that period.

ISM reported that 15 manufacturing industries sectors saw gains in March, including: Apparel, Leather & Allied Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Machinery; Textile Mills; Transportation Equipment; Fabricated Metal Products; Paper Products; Chemical Products; Computer & Electronic Products; Nonmetallic Mineral Products; Primary Metals; and Plastics & Rubber Products. The only two industries reporting sequential decreases were Wood Products; and Petroleum & Coal Products. ISM said that five of the six biggest manufacturing industries — Food, Beverage & Tobacco Products; Machinery; Transportation Equipment; Chemical Products; and Computer & Electronic Products — registered moderate-to-strong growth in March.

The report’s key metrics largely saw declines in March.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 7.9%, to 53.8, growing, at a slower rate, for the 22nd consecutive month, with five of the six largest manufacturing sectors—Food, Beverage & Tobacco Products; Transportation Equipment; Chemical Products; Computer & Electronic Products; and Machinery—increasing new orders at strong-to-moderate levels and 13 sectors showing growth.

Production—at 54.5—decreased 4.0%, growing, at a slower rate, for the 22nd consecutive month, with five of the six largest manufacturing sectors expanding and 11 sectors up overall. ISM said that demand remained strong in March, with labor and material availability continuing to show improvements.

Employment—at 56.3—headed up 3.4%, growing, at a faster rate, for the seventh consecutive month, with four of the six largest manufacturing sectors and 10 sectors overall up for the month. ISM said that its survey panelists’ companies are still struggling to meet labor management plans, while there were signs of improvement compared to February.  

Other notable metrics included:

• Supplier deliveries—at 65.4 (a reading above 50 indicates contraction)—slowed, at a faster rate, for the 73rd consecutive month, with the reading continuing to reflect suppliers’ difficulties in meeting demand from panelists’ companies
• Backlog of orders—at 60.0—decreased 5.0%, growing, at a slower rate, for the 21st consecutive month, nearly reversing an 8.6% February gain, with ISM saying the reading is an indication that incoming business remains high, with output below its maximum potential;
• Inventories—at 55.5—increased 1.9%, growing, at a faster rate, for the eighth consecutive month, and customer inventories—at 34.1—up 2.3%, trending too low, at a slower rate, for the 66th consecutive month; and
• Prices—at 87.1—were up 11.5%, increasing, at a faster rate, for the 22nd consecutive month, marking the biggest sequential gain since a 12.2% increase in December 2020

Comments from ISM member panelists in the report showed some familiar themes, including supply chain issues and pricing, among others.

A primary metals respondent said that the supply chain is still unstable, adding that while there have been some improvements, there remain a lot of issues still unresolved. And a machinery respondent said that prices are increasing on steel and steel products after a slight decrease from highs last month. Adding that transportation costs are going up significantly with the increase in fuel prices.

Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said in an interview said that March’s PMI reading was at the low end of where he wanted it to be but was still in a good place.

“Price growth was really top of mind,” he said. “And there is no real future concern at all about demand, which remains positive. Supply chain comments in the report primarily focused on deliveries and prices and [represented] about 80% of total comments over the last few months. It was at about 50% in February and 39% in March. Pricing was 30% in February and 39% in March. By far, the increase in input costs [supplier deliveries, inventories, and imports] was top of mind, even more so than expediting and delivering materials. It happened pretty quickly, and the primary reason for that is energy markets. When that happened, transportation followed immediately.”

That, in turn, led to a situation in which all of the suppliers that waited last year to go to customers to ask for price increases did not wait this time, going to customers and telling them they would see additional surcharges, according to Fiore.

With employment up almost 4%, Fiore said that was above what was expected and reflected how fewer companies reported having difficulty hiring, as well as fewer workers quitting and also fewer retirements.

“We are clearly making progress there,” he said.

Looking at backlog of orders, Fiore explained that the 60 reading is still really solid, noting that, for a number of years, the reading had not exceeded that level, save for in recent months, which he said serves as a good reflection of the ongoing supply chain difficulties. That is also coupled with demand-related issues in the form of new export orders (down 3.9% to 53.2), which Fiore said could easily be attributed to the commotion in Europe and also the pandemic-related impacts across China and Asia, with the latter seeing shutdowns of entire cities and impacting order levels and activity.

“Those are definitely negatives at the new orders level, with new order comments down nearly 80%, due to the seasonal adjustment factor,” he said. We expected a very strong new orders month in March but the seasonality factors assume normal seasonality, which we have not had in a long time. We are also at a point of record lead times and rising prices. If I was a buyer, I would stop, due to things like Russia and the U.S. facing off, and orders staying out twice as long as I want them to and price growth, with suppliers trying to drive prices even higher. Usually only three-to-six months of order streams are needed, and now it is sitting at nine-to-12 months. Orders for 2022 are mostly full. You are placing orders today that you will not receive until January or February, with prices having jumped up.”

Fiore also pointed to shutdowns in some key China-based manufacturing locations, which results in the continuing flow of materials to U.S. shores slowing significantly, at a time when a West Coast port labor strike potentially looms.

Looking at the first quarter on balance, Fiore broker in down into a few different buckets.

“In January, we got hammered with Omicron,” he said. “We recovered faster in February than we thought we would, and then not long after the Russia-Ukraine war started. My biggest concern is the energy markets, and I think the White House’s move to release oil from the Strategic Petroleum Reserve was the right move. Releasing 1 million barrels per day for the next six months amounts to about 5% of total U.S. consumption. That is meaningful, and it is giving the oil and gas industry six months to get up to rate…and we need to get back to producing 13.5 million-to-14 million barrels per day. We are now below 12 million.”