Massive Supply Chain Issues

The May manufacturing PMI increased slightly from 60.7 to 61.2. We believe the 64.7 reading in March was the cycle peak. However, that might not be valuable information. It depends on how much you value the Markit PMI which has since hit higher levels. Either way, the manufacturing sector is doing very well. This PMI is consistent with 5.2% GDP growth. The ISM PMI is above the 1 year average of 58.4.

The new orders index was up 2.7 points, while the production index fell 4 points to 58.5. The employment index fell 4.2 points to 50.9. This is in line with expectations for 29,000 manufacturing jobs created in May. Last month’s reading was way off from the BLS’s reading of 18,000 manufacturing jobs lost. The BLS report was worse than most reports indicated which is why we expect a modest positive revision.

Huge Supply Chain Woes

The stars of the report were the prices and inventory readings. They were absolutely insane which matches the supply chain & inflation issues facing companies. The supplier deliveries index was up 3.8 points to 78.8 which is the highest reading since 1974. We are still seeing the effects of the pandemic 15 months from when it started. As you can see from the chart below, the customer inventories index fell 0.4 to 28 which is a record low. There’s a shortage of almost everything. This isn’t an ideal situation.

The prices paid index fell 1.6 points to 88 which is still an extremely high reading. In fact, all commodities were up in price accept acetone. All commodities were in short supply. The backlog of orders index was up 2.4 points to 70.6. As you can see from the chart below, the delivery time for raw materials rose to 85 days (up almost 20 days in a quarter). This is a record high using data that goes back to 1987. Demand is spiking and the weakened supply chain can’t catch up. This stress should be alleviated sometime in the next few months. We need to get through the peak of pent-up demand.

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