U.S. manufacturers were hit by a torrent of higher prices, weaker customer demand, slower supplier deliveries, shortages of raw materials, and omicron-fueled labor scarcity that slowed production in January, according to a survey by the Institute for Supply Management.
The ISM manufacturing index headline reading fell to 57.6, falling short of the consensus estimate of 58. This confirmed the weakness seen in the manufacturing survey from the Federal Reserve Bank of New York and ISM’s mid-month estimate.
ISM said that its inflation measure showed prices rising at a faster rate in January after a brief respite in December, pushing the price index to 76.1 percent. This is the 20th month in a rose of increasing prices and the 17th consecutive month in which its index for prices has been above 60 percent.
When the prices index is above 52.6 percent, that typically indicates an increase in the Bureau of Labor Statistics Producer Price Index for intermediate materials, a measure of inflation that looks at prices paid for goods by firms that transform them into products for final sale to businesses, consumers, and governments.
All of the 17 manufacturing industries tracked by ISM reported paying higher prices for raw materials. Ongoing scarcity helped push prices higher for everything from aluminum and steel to cardboard and packaging material to lumber and vegetable oils, ISM said.
The index of supplier deliveries dipped to 64.6 percent from 64.9 percent in December, indicating slower deliveries. All of the six top manufacturing industries reported slower deliveries. But the pace of the slowdown was itself slower, indicating a possible leveling off. ISM’s Timothy Fiore said supplier expected to be back on track in February and moving toward a better supply-and-demand balance in March.
“Deliveries slowed at a slightly slower rate compared with the previous month,” Fiore said. “The index continues to reflect suppliers’ difficulties in meeting demand from panelist companies, as the omicron variant swept through suppliers and the transportation sector, reversing a trend of improvement that began in November.”
The index for production in the ISM survey declined in January to 57.8, 1.6 points lower than the December reading, but remained in growth territory as readings above 52.4 are consistent with increases in official industrial production figures. Ten industries reported growth. Three reported a decrease in production in January: apparel, textiles, and electronic products.
“Shortages of raw materials and labor (due to omicron-fueled unplanned absenteeism) are a constraint to production growth,” Fiore said.
A separate survey, by the data company IHS Markit, showed output growth was “muted” and demand conditions softening.
“The Omicron outbreak has hit manufacturing hard, exacerbating existing headwinds by subduing demand, creating further supply chain issues and causing widespread staff shortages, often through absenteeism due to the surge in COVID-19 infections. The steep downturn in the survey data are indicative of manufacturing production falling in January,” IHS Markit economist Chris Williamson said.
New orders registered a decrease in the rate of growth, according to ISM.
Despite the decline in the headline, at 57.6 the ISM Manufacturng index still points to continued growth in manufacturing and the overall economy. A manufacturing PMI above 48.7, over time, typically indicates economic growth in the broader economy.
The employment index suggested employers added to the payroll at a slightly faster rate in January than December. But hiring was disappointing in December and the result would be consistent with an ongoing slump in payrolls when the Department of Labor releases its read of January hiring on Friday. Still, an increasing share of comments (11 percent in January, compared with seven percent in December) received by ISM noted hiring was becoming easier.
The pace of growth of factory inventories fell in January, indicating a slower expansion linked to high prices, supplier labor scarcity, transportation issues, and an end-of-year inventory drawdown that could not be fully replenished. ISM’s measure of customer inventories ticked up 1.3 percentage points to 33, a measure indicating that customer inventories are too low. Low customer inventories is considered a positive sign for future growth, so the increase in January is an indicator of diminished sales opportunity ahead.
IHS Markit’s Williamson said that inflation was playing a role here.
“Further hikes in input costs led to firms reining in their purchasing activity. Input buying rose at the slowest pace since February 2021 as firms utilised stocks of purchases in production. As such, the rate of growth in pre-production inventories eased to the slowest for ten months. Stocks of finished goods declined further, albeit at the softest pace in four months,” Williamson said.
Williamson noted, however, that manufacturers remain optimistic and that the latest wave has hit manufacturing less than earlier waves.
“However, the overall impact on supply chains from Omicron has been less marked than in prior covid waves, and raw material price pressures have come down as the global supply crunch appears to be improving. Hence manufacturers are upbeat about the outlook, with future output expectations rising to the highest for over a year to suggest that the current downturn may prove short-lived,” he said.