A number of new economic reports out this month indicate the U.S. manufacturing sector is headed toward a slowdown. So what challenges, exactly, are industrial executives facing?
Today, we’re taking a look at how industry executives are navigating this new economic landscape as they look toward the future.
The Institute for Supply Management’s Report on Business shows U.S. manufacturing activity slipped again in May, down 0.7% to 52.1%, from April’s 5-month low of 52.8%, indicating the sector continues to expand at a softer pace.
The ISM’s report finds that new orders, production and employment continue on the upswing, though not at such a robust pace. Supplier deliveries slowed’ and customer inventories were too low, while prices rose.
This follows a lukewarm labor report which finds the U.S. added just 75,000 jobs in May, with jobs virtually unchanged over the month (+3,000).
Employment gains in machinery, computer and electronics products and transportation equipment were offset by losses in food processing, wood products, and fabricated metal products.
IHS Markit’s Manufacturing Purchasing Managers’ Index, another bellwether of the U.S. industrial sector, also found the sector to be expanding at a slower rate, with their diffusion index hitting 50.5%, the lowest it’s been since September 2009.
U.S. manufacturers are contending with a number of uncertainties. The increase effected last month on $200 billion of Chinese goods came as a surprise, as did last week’s threat to impose tariffs on Mexico – though the latter decision was recently reversed, for now.
Many U.S. industrial companies rely on imported materials from China and Mexico, and supply disruptions at the U.S. Mexico border have been an issue, even prior to the tariff announcement.
Many are also wondering how the USMCA, President Trump’s proposed replacement for NAFTA will survive if tariffs are put into place. Companies with U.K. locations and partners are eyeing the fallout from Brexit, while the U.S. labor market remains tight.
At the same time, U.S. manufacturing is still expanding. May 2019 stands as the 39th consecutive month of growth in the nation’s industrial sector, and the 121st straight month of growth in the economy overall. Exports have climbed, while imports have shrunk slightly.
“Comments from the panel reflect continued expanding business strength, but at soft levels consistent with the early-2016 expansion,” said ISM Chair Timothy Fiore, in response to the latest reading on manufacturing activity.
He went on to say: “Respondents expressed concern with the escalation in the U.S.-China trade standoff, but overall sentiment remained predominantly positive.”
Comments from manufacturing executives in the ISM’s May’s report reveal that a multitude of concerns persist, even as businesses thrive.
Tariffs remain a closely-watched factor, with one manufacturer in the chemical products industry reporting a shift in supply chain. “The threat of additional tariffs has forced a change in our supply chain strategy; we are shifting business from China to Mexico., which will not increase the number of U.S. jobs.”
Another respondent in the petroleum and coal products industry stated: “The threat of a 15-percent increase on Section 301 tariffs is a concern. Although the potential has been around for months, the recent deadline was not expected. We had calculated and communicated the potential cost impact to our leadership.”
Price increases, in relation to tariffs were mentioned as well. Says an executive in the plastics and rubber products sector. “Newly increased tariffs on Chinese imports pose an issue on a number of chemicals and materials that are solely produced in China. We are expecting increases in raw materials starting June 1st.”
Growth and strong business conditions remained a a consistent theme among manufacturing executives, it should be noted: “Sales remain strong. Labor remains tight...Tariffs are having a significant impact on cost of goods. No impact on where we buy our goods.”
“Business is continuing to grow and expand,” said one respondent in the miscellaneous manufacturing category. However, they add: “The pressure for driving out costs has increased significantly, and my company is facing major changes over the next several years to remain cost competitive.”
Says another respondent in the machinery sector: “Business continues to be very strong…Key commodity costs like steel have continued to come down. Lead times with suppliers have stabilized after moving out two to three times what they were a year ago. Supply base performance has improved over the past 90 days and stabilized.”
For a complete rundown of the ISM report and the week’s industrial headlines, see our post The Silver Lining in the ISM’s May Manufacturing Report
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