US factories struggle to meet demand as shortages slam production

Nanotronics manufacturing
View of Nanotronics high-tech manufacturing hub during mayor visit at Brooklyn Navy Yard.

  • US manufacturers continued to recover in April, but new risks are slowing their rebound.
  • Popular gauges of industry growth showed supply-chain issues and worker shortages hindering production.
  • Reopening will ease concerns over bottlenecks and massive backlogs, Oxford Economics said.
  • See more stories on Insider’s business page.

Factories can’t keep up with the reopening of the American economy.

Popular metrics tracking the US manufacturing industry indicated strong growth in April. The Institute for Supply Management’s purchasing managers’ index dipped 4 points to 60.7, while IHS Markit’s own gauge rose to a record high of 60.5. Readings below 50 indicate industry contraction, while those above the level signal growth.

The April reports further support the industry’s resilience throughout the pandemic, but underlying trends point to growing risks at American factories. Supply-chain disruptions and raw-material shortages plagued manufacturers throughout the month as the broader economy rebounded. New orders accelerated even further amid stronger client demand, leading backlogs to climb at their second-fastest rate since IHS Markit began collecting data.

“In 35 years of purchasing, I’ve never seen anything like these in terms of extended lead times and rising prices,” one business in the plastics and rubber sector told ISM. Another remarked that they’re “worried about getting the materials to support” such strong sales.

At the same time, gauges of manufacturing-industry employment slowed last month, leaving firms to address burgeoning order books with inadequate headcounts. The hiring woes, coupled with historic supply chain pressures, dragged IHS Markit’s measure of business confidence to a three-month low.

The labor-force shortfall mirrors dynamics seen throughout the service industry as well. Businesses from restaurants to rideshare companies have reported difficulty in hiring as the economic recovery ramps up. Payroll growth is expected to near 1 million new jobs in April, but worker shortages could curb the labor market’s rebound sooner than economists expected.

The growing backlogs and rising material costs are likely to augment the sharp rise in inflation that the Federal Reserve has been warning of for months. Officials have said that reopening and stimulus would boost price growth in the near term before this “transitory” surge fades away.

Manufacturers reported passing down higher input costs to their clients, adding to the inflationary dynamics seen elsewhere in the economy. The rate of sector-specific inflation cooled slightly from March, but still registered at its second fastest on record, according to IHS Markit.

Still, experts see most of the industry pressures easing as the economy settles into a new normal. The continued rollback of economic restrictions will help firms more effectively address issues curbing production, Oren Klachkin, lead US economist at Oxford Economics, said.

“Supply-chain stress will hinder, but not derail, manufacturing’s expansion,” he added. “Bottlenecks will gradually open up as the global economy returns to full health.”

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US business output climbs the most in nearly 6 years as services bounce back, IHS Markit says

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A person wearing a protective mask disinfects tables at an outdoor restaurant in Greenwich Village on February 15, 2021, in New York City.

  • IHS Markit’s gauge of US business output rose to 58.8 in a preliminary February reading.
  • The data marks the strongest rate of growth since March 2015.
  • Revived activity in the service industry drove the bulk of the improvement. Manufacturers grew, albeit at a slower pace.
  • Visit the Business section of Insider for more stories.

A popular gauge of US business output improved the most in nearly six years as falling COVID-19 case counts lifted the service industry, IHS Markit said Friday.

The firm’s Composite Output Index rose 0.1 points to 58.8 in a preliminary February reading, signaling the strongest rate of expansion since March 2015. The bulk of the improvement was driven by an uptick in the service sector. A measure of service activity rose to 58.9 from 58.3, also its highest level since March 2015.

IHS’ manufacturing purchasing managers’ index declined to 58.5 from 59.2, its lowest point in two months. Readings above 50 indicate sector growth, while those below the threshold signal contraction.

The service-sector improvement marks a major turnaround for the national economy. Economic restrictions imposed during the winter surge in virus cases halted the industry’s recovery as Americans were urged to stay at home. While manufacturers’ growth improved, service businesses dragged on overall output.

“The data add to signs that the economy is enjoying a strong opening quarter to 2021, buoyed by additional stimulus and the partial reopening of the economy as virus-related restrictions were eased on average across the country,” Chris Williamson, chief business economist at IHS Markit, said in a statement.

The data follows a similarly encouraging retail-sales report published by the Census Bureau on Wednesday. Americans’ spending at retailers gained 5.3% last month, trouncing the 1% growth anticipated by economists. The jump was likely fueled by stimulus passed in late December and declining case counts.

Slower manufacturing growth in the month to date was attributed to extreme weather and supply shortages. Supplier delays hit a record high in the preliminary report. Rising input costs across manufacturers and businesses drove the biggest selling-price increase since at least October 2009, IHS said.

Business confidence remained elevated, though down slightly from its recent high. Service businesses reported slightly softer expectations, while manufacturers posted the strongest confidence in three months.

While activity in the service sector ticked higher, it hasn’t yet translated to a hiring surge. Firms expanded their payrolls “only marginally” in February, IHS said. Hiring at manufacturers, on the other hand, reached its quickest rate since December 2017.

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