US Manufacturing Expanding

​US manufacturing and construction sectors are struggling to keep pace with demand. due to supply disruptions and labour shortages.  The ISM manufacturing index in June dipped marginally to 60.6 from 61.2 (consensus 60.9), but it was still  a strong report and it is still in expansion territory.

The production index actually rose to 60.8 from 58.5, which was a surprise given the well publicised supply chain issues hitting the sector. However, the fact is the manufacturing sector is struggling to keep pace with the scale of demand. New orders continue to flood in as indicated by a 66.0 reading while the backlog of orders continues to surge, although at a slower pace than in May. This means supplier delivery times continue to lengthen with customers increasingly desperate for stock as indicated by another steep contraction in their inventories.

Labour Shortages

Employment actually fell into contraction territory (49.9) whcih was unexpaected given the strong demand. WHat this tells us is that manufacturers can’t find workers to fill vacancies. Consequently, in order to hire and retain employees, companies will probably have to increase their pay rates to attract candidates. Companies are already paying more for everything else with the prices paid component hitting its highest level since 1979. In the short term, labour is likely to add to those cost increases.

Labour shortages may become less of a constraint from September as childcare issues ease and expanded unemployment benefits come to an end, but there is no guarantee given evidence to suggest potentially more than 2 million people have taken early retirement in the past year. Consequently this could lead towards a longer period of elevated costs for employers as they attempt to find suitable employees.

Given the backlog of orders and customers getting frustrated with low inventory numbers, manufacturers increasingly know they have pricing power and can pass higher costs on. This all adds to the case for higher inflation that is likely to be more persistent than the majority at the Federal Reserve acknowledge with the case building for a 2022 first interest rate hike.

Residential Construction

Residential construction rose 0.2% while non-residential contracted 0.7%. This was the the 15th fall in the past 16 months – given the uncertainty over the need for office space and constraints on local government spending. Residential remains very strong though, with output up 28.2% year-on-year. It's a similar story to that of the manufacturing sector in that there are supply constraints, the cost of materials and the ongoing problem of finding workers. Consequently, there is a higher probability of seeing the rate of activity slow. With strong demand for new homes, house prices are likely to keep rising at double-digit annual rates through the rest of the year.