U.S. Factory Expansion Is Solid; Price Gauge Highest Since 1979

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U.S. manufacturing continued to expand at a solid, yet slightly slower pace in June while a measure of prices paid for materials jumped to an almost 42-year high.

A gauge of factory activity eased to 60.6 from 61.2 in May, according to Institute for Supply Management data released Thursday. Readings above 50 indicate expansion and the June figure compared with the 60.9 median projection in a Bloomberg survey of economists.

U.S. Factory Expansion Is Solid; Price Gauge Highest Since 1979

While a measure of new orders receded, production picked up and allowed manufacturers to make just modest headway on well-elevated order backlogs. At the same time, a gauge of factory employment shrank, adding to evidence that producers continue to have trouble finding skilled workers at a time of robust demand.

“Continued high backlog levels, too low customers’ inventories and record raw-materials lead times are being reported,” Timothy Fiore, chair of the ISM’s manufacturing business survey committee, said in a statement. “Labor challenges across the entire value chain continue to be the major obstacles to increasing growth.”

The ISM’s index of prices paid for raw materials increased to 92.1, a level not seen since the 1979 Iranian revolution and oil crisis. Logistics challenges, elevated commodities prices and shortages of various supplies continue to pressure manufacturers.

Shortages of semiconductors have been particularly disruptive to the auto industry, where production earlier this year was restrained due to the lack of supply.

Select ISM Industry Comments

“Inflationary pressure on materials due to supply and demand imbalance. Electronic components by far the biggest challenge, with lead times going from 16 weeks to 52-plus weeks.” - Computer & Electronic Products

“Strong sales continue, and production output is at 100 percent. Global chip allocation continues to limit some feature offerings — production schedules have been updated to restrict content affected by the chip shortage.” - Transportation Equipment

“Even if we were able to get all the raw materials needed, we would have capacity issues on many of our production units. Manpower has been a concern.” -Chemical Products

“Customers are now placing orders for fourth quarter 2021 and first quarter 2022 due to global supply chain issues.” - Fabricated Metals

“Supply chain issues continue to hamper materials availability and impact production scheduling. Supplier costs continue to rise due to increasing materials, labor and shipping costs.” - Machinery

“Higher prices, inflation and lack of available labor are impacting all organizations in our supply chain.” - Electrical Equipment, Appliances

“We continue to be oversold, based on what we are currently capable of producing. Lack of labor is killing us.” - Primary Metals

Seventeen of 18 manufacturing industries reported overall growth in June, led by furniture, machinery, electrical equipment and appliances, and computers.

Despite last month’s declines in the ISM measures of order backlogs and total bookings, the figures remained elevated. While a gauge of supplier delivery times eased, they remained extended. Manufacturers reported the average lead time for materials used in the production process lengthened to a record 88 days in June.

U.S. Factory Expansion Is Solid; Price Gauge Highest Since 1979

Even as labor and supply constraints continue to limit production efforts, “demand should remain pretty strong through the end of the year, probably into Q1 of 2022,” Fiore said on a call with reporters. That suggests that “raw material prices probably aren’t going to start to relax until somewhere close to the end of the year,” he said.

Meanwhile, a gauge of export orders strengthened, indicating economies overseas are making more headway in their emergence from a pandemic-related slump in activity.

The ISM’s employment index slipped 1 point in June to 49.9, just below the level that signals stagnation even as orders and production remain robust.

The government’s monthly jobs report on Friday is projected to show manufacturing payrolls increased by 25,000 in June, which would be the most in three months. Overall employment is forecast to rise more than 700,000.

©2021 Bloomberg L.P.

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