Demand remains strong, but labor and supply issues continue to be challenging.
By Manuel Gutierrez, Consulting Economist to NKBA
Orders and shipments from manufacturers fell in February, reversing a trend from the previous nine months. Following the collapse in the manufacturing sector during the pandemic shutdown, the industry recovered briskly and approached historical highs in January before this month’s drop.
New orders, shown in the top panel of Figure 1, fell by 1% in February to an annual rate of $506 billion, not far below the all-time monthly high of $511 billion seen in September 2018.
Shipments of durable goods dropped for all six major categories in February.
Manufacturer shipments, represented in the middle panel, also fell, but by a larger 2%, to $502 billion.
In contrast, total inventory actually rose by 1% to $702 billion, a sufficiently high enough level to meet increases in demand.
Demand for manufactured products remain strong, as shown by the modest decline in new orders. However, filling those orders has been challenging owing to the difficulty in finding qualified talent for the process, and in dealing with general supply problems.
In the monthly survey conducted by the Institute for Supply Management, the PMI index, the Institute revealed several emerging problem areas. One is that although deliveries from suppliers are still improving, the rate of improvement is slowing. A second area of concern is the price increases manufacturers are being forced to pay. The third is that export orders are also slowing.
A major challenge impacting the manufacturing sector is reduced availability of parts and materials, with many reporting shortages of critical basic materials. See the latest report from the Institute here.
Manufacturer sales data is normally divided into two segments, Durables and Nondurables. The split into these two categories is based on the time it takes to consume or use those goods. Durables are products that have a longer life, typically more than a year. They include items such as machinery and appliances.
Shipments for all six of the major durable-goods manufacturing industries tracked by the Department of Commerce fell in February (Figure 2.) Although each category has recovered from its collapse during the pandemic shutdown, most have not recovered to pre-pandemic levels.
In February, the sharpest shipments decline was in the largest industry segment, Transportation Equipment, which accounts for 31% of all durable-goods shipments. It fell by 8.2% and is 7.3% lower than a year ago.
Shipments for the other five industry segments fell more modestly for the month. The second biggest drop was in Total Machinery, which was off 2.2%, but only represents 13% of total durable-goods shipments.
Figure 2 also shows that Computers and Electronics & Applianceshave both risen far above pre-pandemic levels. However, computers comprise just 5% of total manufacturer orders. All other categories have not yet recovered to their pre-pandemic levels.
The picture for New Orders is similar, except that orders in one of the six categories, Electronics & Appliances, actually increased in February. New orders in this group rose a modest 0.2% to $12 billion for the month. This category, however, is the smallest of all, contributing only 5% to total new orders.
The largest category, Transportation Equipment, accounts for 15.6% of total orders. This group generated nearly $84 billion worth of orders in February, including $29 billion for vehicles, $14 billion for aircraft and $2 billion for ships, but orders here fell 1.6% in February. It is also the only category for which new orders are lower than they were last year, down by 5.8%.
