ISM Survey Chief: U.S. Manufacturing Will Keep Growing in 2021

BY TIMOTHY R. FIORE

Editor’s note: Every month since 1931, the Institute for Supply Management’s (ISM) Manufacturing Business Survey Committee polls over 800 U.S. procurement professionals in 18 industries to develop a purchasing managers’ index (PMI): a key economic indicator Wall Street often uses in lieu of the federal government’s quarterly GDP figures. The questionnaire covers new orders and deliveries, respondent inventories and their customers’ inventories, backlogs, exports and imports, employment and production levels, deliveries, and commodity prices.

A PMI above 50% indicates manufacturing is expanding; below 50%, that it’s contracting. The all-time high was 77.5% in July 1950; the all-time low, 29.4% in May 1980. PMI hit the lowest level since the Great Recession in April 2020 at 41.5%, and has hovered in the mid-50s since then.

We asked Committee Chair Timothy R. Fiore, former chief procurement officer (CPO) for ThyssenKrupp North America and now Ryder Inc.’s CPO, what may be ahead for the coming year.

Q: As we enter the new year, are global supply chains generally strong, stable, or weak – and why?

A: U.S. manufacturing is stable and increasing in part due to global supply chains recovering from the pandemic, but at different rates. Overall, growth is recovering from an all-time low and sentiment among ISM Manufacturing PMI panelists is strongly positive at 2.3 to 1 (meaning there were 2.3 positive comments for every negative comment). But again, responses vary depending on manufacturing sector.

For example, a fabricated metal products panelist reported business wasn’t improving as quickly as it had declined and a machinery manufacturer said orders were increasing significantly for deliveries in the first half of 2021. An electrical equipment, appliances, and components manufacturer wrote, “Demand remains high, strong finish to 2020 projected with an even stronger 2021. We’re seeing an uptick in reshoring opportunities in the third quarter across various industries and products.”

As of October 2020, new export orders and new orders had grown for three months, backlogs were growing to a respectable level, and customer inventory levels were at the lowest level in 10 years.

As for consumption, production is expanding and employment contraction is easing. Measured by supplier deliveries, inventories, and imports, inputs

are holding back further growth in consumption due to supplier delivery labor, transport, and unwillingness to invest in the future due to the U.S. presidential election and COVID-19 issues.

Q: Will reshoring or near-shoring to the U.S. increase, decrease, or stay the same over the next 12 months? Why?

A: Global low-cost sourcing has been challenged and is now not the primary contributor to sourcing decisions. As a result, reshoring and near-shoring continue from the summer of 2018, when trade issues caused ISM panelists to do more than plan.

The extent of near-shoring remains to be seen, however. Most panelists are near-shoring to secure supply sources (China tensions) and avoid tariffs. Elections will have a significant impact on further activity.

Actions taken to enforce tariffs through the Harmonized Commodity Description and Coding System, or Harmonized System (HS), an international standard for classifying traded products that was introduced in 1988, on base material content make taking advantage of lower-cost steel, aluminum, and copper imports much more difficult.

Q: What market sectors will see the most activity?

A: It’s easier to say what industry sectors won’t grow, and the long-term impact on the rest of the economy is difficult to assess.

In a typical year, commercial aviation accounts for 5% of GDP and nearly $1.7 trillion in economic activity. Federal government support buffered the pandemic’s impact, but even so the sector’s taken a major hit. Aviation’s decline will negatively impact manufacturers of computers and electronics, primary metals, fabricated metal products, and electrical equipment.

Commercial real estate also took a hit that’s impacting sectors including steel production, aluminum, non-metallic materials, plastics and rubber products, office furniture, etc.

Petroleum and coal products as well as mining are also severely impacted, affecting transportation, machinery, steel, computers, non-metallics, and many other industry sectors.

These industries will continue to be impacted into 2022.

Q: What factors are most likely to impede continuing production growth?

A: Lack of renewed U.S. federal government stimulus is the largest headwind. In the near term, suppliers’ inability to keep up are the current limiters to production expansion.

Q: What’s likely to happen with commodities prices, particularly aluminum, steel, and stainless steel?

A: Prices of basic foundational industrial products grew beginning in June 2020 and should continue into Q1 2021. However, that doesn’t take into account the results of the election and any post-election tax changes and stimulus actions. Even though prices typically soften around April, many business plans are predicting Q2 will be better than Q1.

Q: Anything you’d like to add?

A: Overall, manufacturing sentiment has been positive and remains so.

In terms of employment, the trend is toward hiring instead of workforce reductions (3-1 positive). Transportation issues are a good indicator the economy is growing, and the sector’s struggling to keep up. Supply chains are improving their ability to produce despite continued pandemic-related pressures. Although Mexico is a concern because it’s the best place to source after China and the U.S., its healthcare system’s inability to handle the virus could lead to instability.