Manufacturing Finds its Plateau in May 2021 Manufacturing ISM® Report on Business®
Speculation about manufacturing’s post-pandemic recovery — whether it would safely plateau or pull back in a wild swing — is finally over. With the release of the May 2021 Manufacturing ISM® Report On Business®, we finally have an answer.
Manufacturing has plateaued in a positive way. While there continue to be push-pull factors at work regarding supply, demand, and employment, the overall PMI® has settled into a range floating just above 60%. It’s an indication that manufacturing is strong, healthy, and expanding.
Breaking down the Manufacturing PMI®
The overall PMI figure in May is just half a percent up from April, but that small uptick is enough to firmly entrench it above the 60% mark for five of the last six months. It’s a healthy sign for stable recovery. New orders were a driving force behind the stabilization, ticking up 2.7% in May. Supplier deliveries also showed strength, with a 3.8% rise to a stupendous 78.8% index — the highest since 1974! Inventories are also on the rise, up 4.3% in May, officially pushing back into growth territory.
Other variables within the report show nominal increases or decreases — hovering at or above the mark for growth and expansion. That said, two significant drop-offs were present from April to May: production and employment were both down more than 4%. While both remain in expansion territory, there’s looming concern about what these decreases signal for the broader economy in the near-term.
Production and employment figures raise red flags
Production and employment figures are unsettling for several reasons, not least because they’re coming in the face of increased demand for manufactured products. While manufacturers took evasive action during the pandemic, furloughing workers and downsizing, they’re now having difficulty replacing those qualified employees as demand shoots past pre-pandemic levels. From the May 2021 Report on Business:
“Supplier performance — deliveries, quality, it’s all suffering. Demand is high, and we are struggling to find employees to help us keep up.” [Computer & Electronic Products]
“Labor shortages impacting internal and supplier production. Logistics performance is terrible.” [Electrical Equipment, Appliances & Components]
Production rates were significantly affected by material shortages and low employment over the past year. Now, they continue to suffer as raw material shortages blanket industries, and the price of essential materials stays high. If employment and production continue to suffer in tandem, the result is likely to culminate in delayed orders, higher production costs, and reduced volumes. If they do, bigger problems are on the horizon.
Are we entering a period of inflation?
If the United States cannot restructure supply chains and realign value streams, we’re likely headed for a period of inflation. Income inequality and the rising cost of production are set to clash — putting producers and consumers between a rock and a hard place.
There is evidence to support this fear. The average rate of inflation across several countries increased from March to April, going from 2.4% to 3.3% — a rate not seen since the global economic crisis of 2008. Global inflation is a precursor to higher rates at home, and many manufacturers are already feeling the effects as they monitor the rising cost of production and shrinking margins. As they pass price increases along to consumers, inflation seems all but inevitable. But like manufacturing’s anticipated recovery plateau, only time will tell if speculation becomes reality.