American manufacturing is roaring back

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Tuesday, March 2, 2021

Manufacturing activity surges to a three-year high

The U.S. economic recovery continues to be led by manufacturing.

On Monday, IHS Markit and the Institute for Supply Management both released manufacturing activity data for February, with these reports showing the sector growing at the fastest pace in several years.

The ISM's manufacturing PMI registered a reading of 60.8, the highest reading in three years and the fastest since the pandemic recovery began. IHS Markit's reading came in at 58.6, the second-best reading for this index in the last 11 years; only January's reading was better. Readings over 50 for either index indicate expansion within the sector while readings below 50 indicate contraction.

And while the headline reading for both reports result in slightly different historical superlatives, both readings say the same thing about the U.S. manufacturing sector right now — businesses simply cannot keep up with this recovery. And notable pressures exist in both the pricing and delivering of goods right now.

The ISM's prices index surged to 86 last month, the highest level since June 2008, while the backlog of orders index hit its highest level in 17 years. The ISM's supplier deliveries index also hit 72, a reading topped only by a 76 back in April that served as a multi-decade high. IHS Markit's report indicated the longest increase for delivery wait times on record while input prices rose at the fastest rate since 2011.

Taken together, these readings make clear that manufacturers in the U.S. broadly face higher costs while unfilled orders pile up and components to make finished products remain delayed.

A set of circumstances that would suggest an inflationary environment is upon us while a robust recovery is ready to be fully unleashed if supply disruptions are able to abate.

"The manufacturing economy continued its recovery in February," said Tim Fiore, chair of the ISM's manufacturing business survey committee. "Issues with absenteeism, short-term shutdowns to sanitize facilities, and difficulties in hiring workers remain challenges and continue to cause strains that limit manufacturing-growth potential. Optimistic panel sentiment increased, with five positive comments for every cautious comment, compared to a 3-to-1 ratio in January."

Chris Williamson, chief business economist over at IHS Markit, said this data, "suggests that the US manufacturing sector is close to fully recovering the output lost to the pandemic last year."

Williamson adds that, "a renewed surge in optimism suggests the recovery has much further to run. Business expectations about the year ahead jumped to a level only exceeded once over the past six years, buoyed by a cocktail of stimulus and post-COVID recovery hopes as life continues to return to normal amid vaccine roll outs."

And commentary from industry executives in the ISM's report colorfully illustrates the economy's current challenge of navigating a "some good, some bad" environment.

"Things are now out of control," said a contact in the electrical equipment, appliances & components sector currently being squeezed by a global chip shortage. "Everything is a mess, and we are seeing wide-scale shortages.”

“Prices are going up, and lead times are growing longer by the day," said another contact in the machinery space. "While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up."

And so as economic data continues to surprise to the upside, it seems right now that the biggest challenge to growth in 2021 will be whether industrial supply chains can keep up with demand. A good problem to have after a decade spent worrying about secular stagnation and the end of demand-driven growth cycles.

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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