By Mickey D. Levy
The ISM U.S. manufacturing index increased 1.5 points to 60.2 in June, matching the September 2017 index for the second-highest level in this expansion. This indicates that manufacturing activity is entering the second half of the year with robust momentum, because levels above 50 show expansion territory.
The increase in the index was driven by the suppliers' deliveries index, which jumped 6.2 points to 68.2, the second-highest reading since 1979. This index measures delivery times (the higher the index, the longer the delivery time) and suggests that supply chain bottlenecks are worsening.
Of the ten published comments from respondents to the survey, six mentioned the tariffs and resulting uncertainties, shifts in strategic decisions, and price increases.
The long delivery times are being driven by capacity constraints, short supply of raw materials, the oft-cited shortage of truck drivers, and strong domestic and global product demand. Delivery times are being exacerbated by tariffs. To be sure, these supply chain bottlenecks are constraining production, explain why inventory-to-sales ratios remain low, and will continue to put sizable upward pressure on input costs. Notably, 39 percent of respondents reported that delivery times were slower in June, up from 30 percent in May.
The inventories index remained just over 50, but firms continued to view their customers' inventory levels as being too low. As long as inventories remain low, factories will need to continue to boost production to meet demand. Industrial production is already increasing at a 5.4 percent annualized pace in the second quarter, compared to 2.4 percent in the first.
The prices paid index remained high in June, at 76.8, although it moderated slightly. Sixty percent of respondents reported higher costs, and only 3.3 percent said costs were lower. Anecdotal reports and other surveys suggest that manufacturers are able to pass on some, but not all, of the rising costs to their customers. If economic momentum is sustained and input price pressures increase, expect more firms to increase final selling prices. Inflation risks are on the upside.
Global trade indexes were mixed. The imports index jumped almost 5 points to 59 in June, suggesting the broader implementation of steel and aluminum tariffs at the end of May is not yet limiting trade flows into the United States. The new export orders index rose slightly to 56 in June, but remained near the low end of its recent range and counters the strong growth in actual exports reported by the Department of Commerce in recent months. Based on the frequent mentions of tariffs by respondents to the survey, the longer the trade policy tensions last, the higher the probability that businesses will delay, cancel, or reduce investment plans.
Taken together, very strong demand for U.S. manufacturing goods, the Tax Cuts and Jobs Act, strong corporate profits, and deregulation are, up to this point, allowing businesses to overcome supply chain bottlenecks, rising prices, and global trade uncertainties. The industrial sector is entering the second half of the year with strong momentum, but the build-up of risks points to a rockier road ahead.