According to ISM; Supply Chain Problems May Be Slowly Fading
- The ISM manufacturing index declined in December to 58.7%, but was still firmly in expansionary territory.
- All five of the major components were positive for growth over the month, but four of the five declined.
- There were big declines in supply chain-related subindices, suggesting that the worst of the supply chain difficulties are over.
- Manufacturing should continue to expand throughout 2022, although the omicron variant is a downside risk.
The ISM manufacturing index fell to December, but at 58.7% remained well above the 50% level that indicates expansion in the sector. The index was at 61.1% in November. The index has been above 50% for 19 straight months, but gradually declined through 2021.
Four of the five major indices used to compute the overall index fell in December from November, but all five were above the 50% mark. There was a huge 7.3 percentage point decline in the supplier deliveries component to 64.9%; this indicates that supplier deliveries lengthened over the month, but at a slower pace than in November. New orders and production both fell somewhat in December, but both were still solid at near 60%, indicating growing production and further expected near-term growth. Inventories fell to 55% from 57%; businesses added to their inventories over the month, but at a slower pace. The one major index to increase over the month was employment, up 0.9 percentage point to a solid 54.2%, indicating accelerating hiring.
The five subindices not used to calculate the index were all positive for growth in December, although generally at a slower pace than in November. Prices paid fell to 68.2%, still very high, but down from an extremely elevated 82.4% in November. Customer inventories remained too low, but increased over the month. Both exports and import orders increased in December.
All fifteen of the industries covered in the report expanded over the month, with the strongest growth in apparel, textiles, and home furnishings. Respondents’ comments noted strong demand, and that the worst of the supply chain difficulties and price increases are fading. Hiring remained difficult.
The manufacturing recovery continues, although supply-chain problems, rising prices, and a tight labor market remain constraints. However, both the subindices and the anecdotal reports suggest that the worst of these supply-chain problems and price are in the past. Manufacturers reported that price increases slowed significantly in December and that although deliveries continue to lengthen, they are doing so at a slower pace. Labor remains a significant constraint on increasing output.
Manufacturing will continue to expand throughout 2022 and into 2023 as supply-chain constraints fade. Demand for goods remains strong, and autos, building materials, and business investment will be positives this year. Exports as the global economy recovers will be another plus. However, consumer spending growth will shift from goods to services over the course of 2022 as the economy reopens; consumers have increased their purchases of goods relative to before the pandemic, so there is less need for some goods as the economy recovers. Autos will be the major exception, as the global chip shortage weighed on production and sales in the second half of 2021.
The survey was taken largely before the omicron variant hit the economy in the second half of the month; only one of the anecdotal comments refers to omicron. The variant is a downside risk to the manufacturing outlook.
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