U.S. Manufacturing Expanding, So Why So Nervous?

The Trump administration’s off-again, on-again romance with steel and aluminum tariffs is causing considerable anxiety among U.S. manufacturers. Although domestic manufacturing is humming — the Institute for Supply Management’s leading factory index, the PMI, increased by 1.4% in May to 58.7 – tariffs are already impacting imports, exports, and prices.

Photo by Frank McKenna on Unsplash

Photo by Frank McKenna on Unsplash

“We are concerned about the strong dollar affecting our export orders as well as the steel tariffs, which are causing domestic steel prices to rise,” one manufacturing executive told the ISM.

Most of the ISM’s May numbers were up and to the right—any number above 50 indicates growth. The production index registered 61.5%, a 4.3 percentage point increase compared to the April reading of 57.2%. The employment index registered 56.3%, an increase of 2.1 percentage points from the April reading of 54.2%. The supplier deliveries index registered 62%, a 0.9 percentage point increase from the April reading of 61.1%. The inventories index registered 50.2%, a decrease of 2.7 percentage points from the April reading of 52.9%. The prices index registered 79.5% in May, a 0.2 percentage point increase from the April reading of 79.3%, indicating higher raw materials prices for the 27th consecutive month.

“Consumption, described as production and employment, continues to expand despite labor and skill shortages,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. “Inputs, expressed as supplier deliveries, inventories and imports, had expansion declines, due primarily to inventory reductions likely caused by supplier performance issues.

“Lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue,” Fiore added. “Export orders expanded at slower rates. The prices index is at its highest level since April 2011, when it registered 82.6%. Demand remains robust, but the nation’s employment resources and supply chains continue to struggle. Respondents say price pressure at their companies is causing price-increase discussions as we prepare to enter H2.”

Import and export growth both decelerated in May, by 3.7% and 2.1%, respectively, likely due to a strengthening dollar and tariffs. “The biggest threat to exports is the trade imbalance, and that’s really subject to how heavily those dollars will be tariffed,” said Fiore.

Across all U.S. industries, production has failed to keep pace with demand, and it remains unclear how quickly capacity is being added. “That’s the $50-million question,” said Fiore. “Part of the reason is supply constraints, and to some extent, employment. Production expansion has also been softening by manufacturers’ inability to convert raw materials into end products.”

Customer inventories, he added, are at record lows. “Employment did rebound to some extent in May but it should have done better. The tariff stuff hit the supply chain hard the first time, and the more recent announcement is going to expand buyer lead times even further. And steel mills are not very flexible in responding to demand.”

What is of more concern is prices, Fiore said. “On prices we’ve averaged over 71 points over the last 11 months. That’s the longest runup since the sub-prime mortgage activity. Manufacturers are saying that they intend to pass on these price hikes to the customers, and we’ll start to see evidence of that in Q3. If they are successful, the Fed will have to reassess policies; if not, manufacturers will see their margins compress and they’ll try to offset that by better productivity. For most companies there’s not a lot of wiggle room there.”

 The electronics industry has been feeling the impact of upward pricing and downward supply for some time. Manufacturers fear their growth for 2018 may be hampered by component shortages. “Severe allocation, long lead times and upward price pressure, particularly in the electronic components market, continue to hamper our ability to meet customer demand and our shipping schedule,” said one electronics industry executive.

The ISM reported the following commodities used by U.S. manufacturers are up in price: aluminum, aluminum-based products, brass, capacitors, caustic soda, cobalt, copper, corrugate, corrugated boxes, corrugated cartons, electrical components, freight, paper, resistors, steel — galvanized, steel — hot rolled, steel — hot rolled plate, steel — stainless, steel — stainless steel bar, steel — stainless steel sheet, steel based products, and wood.

2 comments on “U.S. Manufacturing Expanding, So Why So Nervous?

  1. LouisSmith
    June 6, 2018

    In this article, absolutely correct things are written, I want to say more, so it will remain a few more years. Want to learn more about this topic, then online casino review help you answear for this question. 

  2. PaulChau
    July 12, 2018

    I don't think that the problem here is whether or not the industry is expanding. It's how they are going about doing it and burning all the bridges they've built in the process. Everyone is going to be iffy about what is going to happen here on out with the way that that they are handling all of their administration now. And that's just sticking to this one industry and not talking about any of the other departments they've making a mess of currently either..

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