These Are Not Typical Times — How to Navigate the Manufacturing Economy in 2022

WEB EXCLUSIVE

In November, Timothy R. Fiore, CPSM, C.P.M., spoke with Fabricating & Metalworking’s Editor Rachel Duran to discuss the outlook for the supply chain and manufacturing in 2022. Fiore is the chair of the manufacturing business survey committee for the Institute of Supply Management (ISM).

The ISM serves supply management professionals in more than 90 countries, and its 50,000 global members manage about US$1 trillion in corporate and government supply chain procurement annually. ISM publishes a monthly Manufacturing Report on Business, which is one of the most reliable economic indicators available regarding what happened in the manufacturing economy the previous month.

Fabricating & Metalworking: Regarding 2022, what does “Be Ready… Planning for the Take Off” mean to you?

Timothy Fiore: We took off last summer and we are about 16 months into what is generally a 36-to-37-month manufacturing expansion.

The neat thing about manufacturing is that it is highly cyclical, and we are very early. Either early up or early down. So, we were predicting a slowdown in the U.S. economy prior to the pandemic hitting because we experienced it in the manufacturing sector about six months prior to that.

We started with an April 2016 expansion that started under President Obama, dipped once in August 2016 [less than a 50 percent PMI reading] and then we took off. In May of 2020 we climbed up sharply coming out of the big v [height of the pandemic] and we hit a record PMI in the first quarter of 2021.

We have been running consistently above 60 for the last year. It is a high-quality expansion in typical times. This is easily a 35-month expansion — but these are not typical times.

F&M: Indeed, these are not typical times. Describe where we are.

Fiore: There has been pent-up demand and a whole bunch of stimuli in the economy that people want to spend. There is such a strong demand for goods, for durable goods especially.

Manufacturing cannot keep up, and we don’t see that going away as things soften. We do see it easing a little bit on the supply chain constraint side, which will allow production and output to start to satisfy that demand.

There is another thing: labor. In the case of the PMI report, in the month of October, 5 percent of my employment comments stated things were better for hiring versus September, which was 3 percent, and August, which was 0 percent.

It is labor at the supplier level that has caused mass disconnection in transportation sector. Transportation always used to be a solver of problems. You would use expediate freight to make up for time. It is now the cause of problems. You used to plan three weeks for materials; now you are planning six weeks to eight weeks.

Manufacturers are taking material deliveries earlier than they normally would to protect themselves or because they are forced to.

F&M: Drill down and highlight the fabricated metal sector of manufacturing, which is among ISM’s six leading manufacturing sectors. It seems to be holding its own in 2021.

Fiore: The top six [sectors] make up 70 percent of the manufacturing economy, and fabricated metals makes up 6.1 percent of the manufacturing economy at No. 6.

At one point, April of this year [2021] it was the No. 1 industry sector of the big six. Based on the ISM’s surveys, the sector’s PMI rose above 55 percent in September 2020, remaining above 60 percent until a dip in September 2021, and bouncing back above 60 percent in October 2021.

When comparing the PMI of the fabricated metal products sector to the rest of the manufacturing economy’s PMIs, there are definitely labor strains but not as bad as some sectors. I would say this is a fairly heavy employment sector compared to revenue. For instance, compared to chemicals, on a per dollar revenue basis, there are more employees in fabricated metal products than there are in chemicals.

When it comes to production, there is a hold back on production, but again, not as bad as some other industry sectors. So, it is the mills and lead times and the availability and demand on those that is probably the biggest drawback. And those aren’t labor related. Production has been seesawing a little bit — but generally I would say 60 percent index value is very strong performance.

In the fall of 2021, new orders were coming down, with a steady backlog, slightly more than 50 percent. It is not a contraction, but slowed down from what it was before, in the mid to high 60s, and even in some cases, higher than that.

As large industries, such as automotive, continue to deal with shortages, they have rolled their schedules into 2022, and the whole forecast is shifting right with all the sub-suppliers. As a result of that, and in the case of fabricated metal products, once you have that material, your lead times are just conversion time. The cold starts might be long but once you have good a pipeline of inventory of raw material, your conversion times to get an order and deliver a product is pretty short.

Fabricated metal products industry companies most likely have six months of inventory (steel and aluminum) on the shelves right now and can communicate back to customers that conversion times are two-to-three weeks — therefore, the order cycle is shrinking.

F&M: Tell us about your predictions for 2022.

Fiore: This will exceed the typical manufacturing expansion cycle of 36 weeks. It could exceed it by at least a year because companies are not able to operate at maximum levels yet due to supply chain and labor constraints, which will continue through the first half of the year.

Watch the transportation sector first. Once it starts getting better it will indicate a move at returning to normalcy. Once we enter that phase, there is a ton of inventory accounts to fill, not only at the customer level but at the company level. There is at least three months’ worth of strong activity for that.

Due to inputs constraining outputs, the manufacturing sector’s strong expansion cycle will stretch across a period of time, which in the end, will be better for the industry overall because it will avoid the experience of a high peak or low valley.

Where do we go from here? Invest in the future. People are placing CAPEX dollars like crazy. To some extent, look for automation because the workforce issue is not going away. Labor is and will continue to be a real issue in the manufacturing economy. A secondary issue is the cost of energy, which is out of sight, and if we didn’t have energy where it is, we probably wouldn’t be feeling all this inflation. But, if you can’t get people back to work or find people to go to work, then we will struggle, and it will be a slow recovery.

www.ismworld.org