ISM report says manufacturing finishes on solid footing amid an uneven 2020

Manufacturing activity finished 2020 on a high note, growing for the seventh consecutive month, 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, came in at 60.7 (a reading of 50 or higher indicates growth), which was 3.2% above November’s 57.5, while the overall economy expanded for the eighth consecutive month. This represents the highest PMI reading for 2020, with October’s 59.3 and November’s 57.5 rounding out the top three months. And December’s PMI is 8.2% higher than the 12-month average of 52.5.

ISM reported that 16 of the 18 manufacturing sectors it tracks saw growth in December, including: Apparel, Leather & Allied Products; Furniture & Related Products; Wood Products; Fabricated Metal Products; Machinery; Computer & Electronic Products; Transportation Equipment; Plastics & Rubber Products; Paper Products; Chemical Products; Petroleum & Coal Products; Primary Metals; Textile Mills; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; and Miscellaneous Manufacturing. And the two industries that contracted were Printing & Related Support Activities and Nonmetallic Mineral Products.

Each of the report’s key metrics saw growth, to varying degrees, in December.

New orders, which are commonly referred to as the engine that drives manufacturing, rose 2.8%, to 67.9, growing, at a faster rate, for the seventh consecutive month. This matched October’s reading for the highest, for any month, going back to January 2004’s 70.6. And the report said that 13 of the 18 manufacturing sectors it tracks saw new orders gains in December, including the six largest manufacturing sectors.

Production—at 64.8—saw a 4% increase, from November to December, growing, at a faster rate, for the seventh consecutive month, with 13 manufacturing sectors reporting gains, including five of the top six sectors seeing moderate to strong expansion. What’s more, this marks the highest monthly reading going back to January 2011’s 65.3, with production topping the 60 mark for the sixth straight month.

Supplier deliveries—at 67.6 (a reading above 50 indicates contraction)—slowed, at a faster rate, for the 14th consecutive month, with the report observing that suppliers are continuing to struggle, as transportation challenges and challenges in supplier-labor markets still constraining production growth, while also reflecting the difficulties suppliers have been experiencing over the course of the COVID-19 pandemic. And it added that supplier labor and transportation constraints are not expected to diminish in the near-term due to the pandemic.

Employment—at 51.5—saw a 3.1% gain over November, following a 4.8% November decline, with three of the top six manufacturing sectors heading up. And inventories—at 51.6—eked out a 0.4% gain, growing for the third consecutive month after contracting for three straight months. The report explained that inventory growth stability amid ongoing supplier constraints indicates that supply chains are currently meeting near-term production demand, in spite of transportation and COVID-19 headwinds.
Like the November report, the December report highlighted how COVID-19 continues to impact manufacturing operations and output.

“Our company and industry are continuing to have tailwinds from the COVID-19 pandemic research support for vaccines and treatments,” said a Computer & Electronic Products respondent. “While our services are delayed, many customers are not cancelling outright, and business picked up for us in the last month — especially in China, where business growth is back on track.”

And a food, beverage, and tobacco respondent noted that COVID-19 is affecting his company more strongly now than back in March, with vendors/service suppliers unable to maintain levels of service due to employee shortages, coupled with logistics issues related to coronavirus-related problems.”

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, said that these December numbers represent a great finish to what was a very difficult year, amid various challenges.

“I think we continue to have labor constraint issues, not only in supply chain but also for our panelists’ companies,” he said. “Those are continuing to rear their ugly head, and there is no real end in sight in the short-term…and will be the case until there are widescale vaccinations. Unplanned absenteeism and difficulty in hiring continue.”

In December, Fiore said there was a 2:1 positive hire versus forced reduction ratio, which is a drop from 2.5:1 in November, and there was a 4:1 hire-to-fire ratio, which marked a nearly 50% drop from November’s 7:1. That indicates the need for labor may be declining, which could be related to seasonality issues, as many people took time off over the second half of December into early January.

“It is becoming even clearer now, as we have gone through December, that the labor issues are going to get even worse, because the rollout of the vaccine program has not gone as planned…and is probably going to take a couple of more months to get up to speed,” he said. “It could be the end of the third quarter by the time it is done, but we have to fight through that.”

Despite the ongoing manufacturing labor issues, Fiore said there is ongoing sentiment that the second half of 2021 is likely to be stronger than the first half of the year.

“Manufacturing is leading the country out of recession, and we have a clear V-shaped profile,” he said. “It could be because people have more disposable income to spend on goods versus services, with savings rates much higher, which means many people are not doing things that they normally would have. The dollar has gotten weaker in the last six months, which makes our products more competitive overseas [new export orders have had three straight months of readings above 55], which is helping new orders. I would rather have the problem of trying to find and attract labor to satisfy demand than having to go out and find demand. This is manageable in a lot of respects and is just going to take some time.”