Too hot leads to forced cool down

The April ISM manufacturing index fell to 60.7, down 4 pts from March and that was well below the estimate of 65 because of the major supply problems. New orders fell by 3.7 pts but still is high at 64.3. Backlogs were little changed, up .7 pts to also a high level of 68.2. Supplier deliveries, reflecting the supply challenges, fell by 1.6 pts but remains very elevated at 75. Inventories, not surprisingly in the current supply environment, fell by 4.3 pts to back below 50 at 46.5. Customer inventories fell further to just 28.4 from 29.9 in March. Export orders rose a touch by .4 pts to 54.9 while imports fell by 4.5 pts. Employment declined by 4.5 pts to 55.1 but after rising by 5.2 pts last month. Finally, prices paid accelerated by another 4 pts to 89.6 (ranges from 0 to 100), the highest level since July ’08 when it was above 90 when a barrel of crude oil was near $150. All 18 industries surveyed saw higher prices.

All 18 industries surveyed saw growth in the month but the reason for the m/o/m decline in this index is that things are almost too good relative to the ability of businesses to deliver as “companies and suppliers continue to struggle to meet increasing rates of demand due to Covid impacts limiting availability of parts and materials. Recent record long lead times, wide scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing growth potential.”

Bottom line, sometimes when thinks run too hot, the heat forces a cool down, unintended and that’s what we have now in manufacturing. The realization likely explains why Treasuries are rallying in response with the 10 yr yield back below 1.60%.

Here are some quotes from different companies in different industries reflecting the environment:

“The current electronics/semiconductor shortage is having tremendous impacts on lead times and pricing. Additionally, there appears to be a general inflation of prices across most, if not all, supply lines.” (Computer & Electronic Products)

“Upstream producers/suppliers are back online and working towards full rates. Demand is outpacing supply and will continue into the third quarter, when the supply chain is expected to be refilled. Supply/demand should be more balanced in Q3/Q4, but demand will continue as customers run hard to meet their demand and rebuild inventory.” (Chemical Products)

“Continued strong sales; however, we have had to trim some production due to the global chip shortage. Hasn’t affected inventories greatly yet, but a continued decrease will begin to reduce available inventories if we don’t recover chip supply shortly.” (Transportation Equipment)

“Steel prices are crazy high. The normal checks on the domestic steel mills are not functioning — imported steel is distorted by the Section 232 tariffs.” (Fabricated Metal Products)

“It’s getting much more difficult to supply production with materials that are made with copper or steel. Lots of work on the floor, but I am worried about getting the materials to support.” (Electrical Equipment, Appliances & Components)

“Market capacity in most areas is oversold, with no realistic improvement on the horizon. In fact, it appears that demand will continue to strengthen, leading to more significant disruptions.” (Furniture & Related Products)

“In 35 years of purchasing, I’ve never seen everything like these extended lead times and rising prices — from colors, film, corrugate to resins, they’re all up. The only thing plentiful at present, according to my spam filter, is personal protective equipment [PPE].” (Plastics & Rubber Products)

“The metals markets remain very challenging at best. Shortages of raw materials have increased, especially in aluminum and carbon steel. Prices continue to rapidly increase. Transportation and trucking [are] also a big challenge.” (Primary Metals)

“Demand continues to be very strong. Supply chain delays hamper our availability and ability to sell more.” (Machinery)

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