US Supply Constraints

​The May ISM manufacturing index increased to 61.2 from 60.7 which came in just above the consensus. Production decreased from 62.5 to 58.5, but is still above the break-even 50 level. This slower growth in output is probably because supply chain issues are putting constraints on output, rather than declining demand. 

New orders confirm this as they increased to 67 from 64.3 and backlog orders were at all-time highs. This tells us that the US manufacturing sector continues to perform very strongly, but at the same time, supply chain issues are casuing a few problems for output and the knock on effect of this is increasing prices. We are also seeing delivery times increase to their highest since 1974 and no doubt impacted by shortages in the auto industry and challenges in recruiting workers.

Finding Workers

The employment figures show there are challenges in finding workers. Home schooling has forced parents to say at home and indeed some people are in no rush to go back to work given the pandemic. The uprated unployment benefits are also not creating an incentive to return to work when taking into account childcare costs etc. Its unlikely that these factors will ease off any time soon and may impact the labour figures for some time to come.

Struggling to Keep up with Demand

Consumer demand is high following the lifting of COVID-19 restrictions and people want to spend some money. Inventories are at an all time low and those supply chain constraints are causing delays in replenishing inventory. Throw these into the melting pot and you've got a recipe for inflation. With high demand, constrained supply and increasing input prices, it's not dfficult to see inflation heading northward for some time to come and potentially more persistent than the Fed expects.