US Output & Supply Chain Woes

​Supply chain issues are resulting in manufacturers struggling to keep pace wth demand. In the current environment, consumer demand is strong and this is causing more shortages. High demand and low supply sets the scene for higher prices and we'll explore this further in this article.

​ISM Manufacturing Ouput

The Institute for Supply Management has reported that new orders continue to grow strongly, but supply chain issues appear to be holding back production. Consequently, we are seeing record high order backlogs. This in itself presents an opportunity for more growth in ouput because of the high demand. It also presents and opportunity for job creation. Lets take a closer look at the numbers.

US manufacturing output increased 0.9% in May versus the consensus of 0.8% but the April number was revised down significantly to an output growth of 0.1% versus the 0.5% rate initially reported. This leaves manufacturing output down by 0.7% on the pre-pandemic peak, having fallen 19.8% from the peak in January to the trough in April last year. The future is looking brighter with a full recovery in manufacturing output expected in the next few months. However, given the high demand and supply chain issues, there is a real risk of prices rising significantly if this situation persists.

Retail Sales

US retail sales dipped in May but they remain very strong as the economy re-opens and consumers want to spend their money and enjoy some retail therapy! US retail sales were down 1.3% month-on-month in May, but some of this can be offset by significant upward revisions. April’s month on month figure of 0% has been revised up to 0.9% growth.  The details show auto sales were down 3.7% month on month, which may well be caused by a slow down in production due to supply chain issues. Eating and drinking continued to make a recovery (+1.8%) which is the third consecutive monthly gain. Coming after the significant upward revisions in the April figure and the surge of 11.3% in March driven by stimulus, the dip in May's retail sales aren't too shabby. 

Consumer Finances

Last week's Federal Reserve flow of funds data showed households have seen their wealth surge $20tn since the end of 2019 with $3tn of that increase in liquid cash, checking and time savings deposits.  Consumer finances are in good shape and with this kind of financial firepower, there is a lot of support for consumer spending that could go on for many months yet.

PPI & Pipeline Price Pressures

We have also had the producer price inflation report which showed a pick-up in inflation with month on month price rises hitting 0.8% versus the 0.5% consensus. Excluding food and energy, the numbers came in at 0.7% versus 0.5% forecast. Food showed the second consecutive 2%+ month on month reading while transportation and warehousing rose 1.9% month on month. Other components also posted sizeable gains, so this tells us that we've got some pipeline pricing pressure.

Conclusion

The ISM report showed that the order books continue to grow strongly, but production is struggling to keep pace. The the backlog of orders has risen to new all-time highs while at the same time customer inventories are at record lows. So what does this tell us? Well, it certainly suggests that pipeline price pressures will continue to build, and this could lead to consumer price inflation staying higher for longer.