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Washington, Nov. 2 (BUS): US manufacturing activity slowed in October, as all industries reported record long raw material delivery times, indicating that extended supply chains continued to constrain economic activity in the early fourth quarter.
Monday’s Institute for Supply Management (ISM) survey also hinted at some moderation in demand amid rising prices, with the gauge of new orders dropping to a 16-month low. However, demand remains strong with retail stocks continuing to fall, which should keep manufacturing booming, Reuters reported.
According to the ISM, “companies and suppliers continue to grapple with an unprecedented number of hurdles to meet growing demand.” The government reported last week that the economy grew at the slowest pace in more than a year in the third quarter due to widespread shortages linked to the COVID-19 pandemic.
“The stress in US supply chains is not easing, lending downside risks to our near-term GDP growth outlook and clear upside risks to inflation expectations,” said Ryan Sweet, chief economist at Moody’s Analytics in West Chester. Pennsylvania.
The ISM’s index of national factory activity fell to a reading of 60.8 last month from 61.1 in September. A reading above 50 indicates expansion in manufacturing, which accounts for 12% of the US economy. Economists polled by Reuters had expected the index to fall to 60.5.
ISM reported that 26 commodities were in short supply in October, some for 13 consecutive months. This compared to 24 in September.
The economy suffers from shortages in various industries as global supply chains continue to become clogged. Supply restrictions were exacerbated by a wave of delta-driven coronavirus infections over the summer, particularly in Southeast Asia. Congestion at ports in China and the United States has also delayed materials from reaching factories and retailers.
The auto industry has been hardest hit amid a global shortage of semiconductors. Transportation equipment manufacturers said in the ISM survey that they have shifted chips “to our higher-margin vehicles and halted or limited production schedules for lower-margin vehicles.”
The ISM Supplier Delivery Survey rose to a reading of 75.6 last month from 73.4 in September. A reading above 50% indicates slower deliveries. Economists and companies expect supply chains to remain tight through 2022.
Long waiting times for materials resulted in persistent high inflation at the factory gate. The survey’s gauge of prices paid by manufacturers accelerated to 85.7 from a reading of 81.2 in September. Prices of 48 commodities rose last month, with only wood prices declining. The prices of products such as steel have risen for 15 consecutive months.
These higher costs are passed on to consumers, which, along with higher wage growth, raises concerns that higher inflation could be more persistent rather than temporary as Federal Reserve Chair Jerome Powell has repeatedly argued. On Friday, the government reported that wage growth in the third quarter was the strongest ever.
Federal policy makers are scheduled to meet on Tuesday and Wednesday. The US central bank is expected to announce that it will start reducing the amount of money it is pumping into the economy through monthly bond purchases.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury yields rose.
The forward-looking new orders sub-index in the ISM survey fell to 59.8 last month, the lowest reading since June 2020 when COVID-19 lockdowns were in effect, from 66.7 in September. Factories have a lot of unfinished work.
“One explanation for this dramatic decline may be that manufacturers are facing a changing model that accepts supply constraints as a new reality,” said Kurt Rankin, an economist at PNC Financial in Pittsburgh, Pennsylvania.
“Demand does not appear to be receding, which raises the question as to whether corporate patience and profitability potential has been exhausted, and that new inventory management techniques and the promise of fewer goods on offer can emerge.”
Factories hired more workers, with hiring expanding for the second month in a row. Although manufacturers said they were still struggling to find workers, there were hopeful signs.
According to the survey, “an increasing proportion of comments indicated an improvement in hiring, compared to less than 5% in September.” She also noted that “the vast majority of committee members indicate that their companies are recruiting or trying to hire.”
That, combined with a jump in consumers’ perceptions of the labor market last month, points to an acceleration in employment gains in October after the economy created the fewest number of jobs in nine months in September. However, the shortage of workers remains a hindrance. There were 10.4 million job openings at the end of August.
On Friday, the Labor Department is due to release its closely watched employment report for October.
A separate report from the Commerce Department on Monday showed that construction spending fell 0.5% in September, which was blamed on shortages and Hurricane Ida in late August.
However, the spending composition was not as weak as the government assumed in its advance estimate of third-quarter GDP last week. This has led some economists to expect third-quarter GDP growth to be revised to around 2.2% from the reported 2.0% pace when the government releases its second estimate later this month.
MI