US manufacturing remains robust despite challenges
The ISM Manufacturing Index fell slightly in January to 57.6, more or less in line with expectations.
January’s decline marked the third consecutive month in which the index eased moderately. Even so, the result indicates continued, solid expansion in the manufacturing sector.
Notably, both new orders and order backlog continue to grow but are showing evidence of rolling over. That likely reflects the impact of the cost of raw materials, which aren’t only still rising but, in some cases, accelerating. The breadth of industries experiencing higher prices is broadly indicative of the scope of the challenge, which is widespread.
Additionally, the slower pace of supplier deliveries creates an additional headwind to production. Global supply chain disruptions remain a major challenge, from production and shipping outside the United States to nationwide capacity constraints on transportation. Even if demand is crisp, demand can’t be met if the materials aren’t available to ramp up production.
Given the disruptive effects of the surging omicron variant since late last year, it’s not surprising that the manufacturing sector is feeling the effects. Millions of workers were temporarily sidelined since the beginning of the year due to illness or precautionary quarantine requirements to reduce the risk of spread. The impact of worker shortages has rippled through the economy, impacting schools, healthcare, transportation, and service industries. Against that backdrop, manufacturers were certainly not immune.
On a positive note, manufacturing employment expanded at a modestly faster pace, but the shortage of skilled workers remains a major challenge for employers. The solution isn’t as easy as hiring and training service sector workers looking for a change. Labor shortages are widespread and cut across most industries, exacerbated by the changing face of work for many Americans who have adopted a work-from-home or hybrid model. The competition for labor remains intense and will likely continue for the foreseeable future. Further upward pressure on wages and a growing emphasis on flexibility and benefits are to be expected.
The bottom line? The manufacturing sector continues to grow at a solid clip, but a combination of rising prices, thin inventories, supply chain constraints, and tight labor markets remain headwinds to the industry. Expect that to continue in the near term.
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