Ukraine Uncertainty, Surging Prices Impact U.S. Manufacturing Activity Index

Activity in the U.S. manufacturing sector slowed in March, as industrial companies faced heightened supply chain snarls and a surge in prices, while uncertainty over the war in Ukraine has begun to hit home. This is according to the Institute for Supply Management's March survey of supply chain executives, released April 1st. 

The ISM reports its index of manufacturing activity eased 1.5% in March to a reading of 57.1%. Any reading over 50 indicates expansion, and this month marks the sector’s 22nd month of growth.

The New Orders index fell 7.9% to a reading of 53.8%--the lowest the index has been since September 2020, while the production index declined 4% to a reading of 54.5%. Meanwhile, backlogs, raw materials inventories, exports and imports all grew in March.

Timothy Fiore, the Chairman of the ISM notes that the U.S. manufacturing sector remains in a “demand driven, supply chain-constrained environment.”

Silver Lining

However, improvements in the labor market were a major bright spot in this month’s report, with ISM’s employment index rising 3.4% to 56.3. Fiore noted that “Progress was made to solve the labor shortage problems at all tiers of the supply chain, which will result in improved factory throughput and supplier deliveries. Panelists reported lower rates of quits and early retirements compared to previous months, as well as improving internal and supplier labor positions.”

Prices

Meanwhile, prices paid by manufacturers surged 11.5% in March to 87.1%, as instability in global energy markets continue to drive up prices. This is the highest the Prices index has been since June of 2021, when the index hit 92.1%. Fiore noted that “suppliers are not waiting to experience the full impacts of price increases before negotiating with their customers.”

Adhesives, paint, aluminum, electrical components, steel products, and rubber-based products are among the many commodities up in price.

Manufacturers remained optimistic in March – though slightly less so compared to February. The ISM tracked six positive comments for every one negative comment provided by industrial executives. This is down from the 12 positive comments for every one negative comment registered in February.

In March, fifteen of eighteen industries reported growth, strongest in apparel, leather & allied products; furniture & related products; food, beverage & tobacco products; electrical equipment; and appliances & components.

What Manufacturers Are Saying About Business Conditions

Comments from manufacturers reflected concerns about supply chain constraints and high prices, while uncertainty over the war in Ukraine has also begun to impact operations.

One executive in the food products industry stated “The Russian invasion of Ukraine has created uncertainty in the grain markets, causing upward pricing pressure. In addition, inflationary pressures across all categories have made it challenging to manage cost and profitability.”

Another in the machinery sector reported “Prices are increasing on steel and steel products after a slight decrease from highs last month. Transportation costs are going up significantly with the increase in fuel prices.”

As buyers anticipate higher prices, this has also led to a hike in new orders for some suppliers. “Customer orders are brisk in the face of significant prices increases,” said one respondent in the chemical products industry.

Still, backlogs continue to increase as companies struggle to meet orders amid supply and labor constraints. One executive in the electrical equipment sector stated “Backlog is still increasing—currently at about three months of production. Availability of purchased material continues to constrain production, causing the increased backlog.

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