MNI INTERVIEW: Scarcity Fear is Creating Artificial Demand-ISM

Companies fearing shortages and stalled deliveries are placing extra orders to make sure they don't run out of products, suggesting manufacturers may eventually suffer a wave of cancelations and an inventory glut, ISM survey chief Tim Fiore told MNI.

"I've heard some ugly stories. Chip delay times are out to a year now, steel is out to four to five months, and so some are placing orders today for steel that you want to have delivered to you in February," he said. "Do you really know what your demand is going to be in February?"

"That's the risk of those extended lead times. It drives up new order levels, and there is essentially artificial demand out there that is pretty much disconnected from what what may happen six, seven, eight months out."

The ISM index's new order level for September of 66.7% includes about 4 percentage points of artificial bids. That share could increase in coming months as buyers try to get ahead of any expected price increases, Fiore said.

"That whole situation with extended lead times will get worse because nobody right now is confident that they're going to see any kind of significant decline in prices," he said.

PERSISTENT SUPPLY KINKS

September's ISM report continued to show demand outpacing supply capacity with the headline index coming in slightly above expectations at 61.1, up from the previous month's 59.9. The index of delivery times rose 3.9 percentage points to 73.4, suggesting more bottlenecks.

Fiore echoed Fed Chair Jerome Powell's comments this week that the supply chain crunch will persist well into next year. For some key products such as chips the kinks could linger much longer due to the Delta variant and the lack of vaccines globally, Fiore said.

"When it starts to show signs of improvement and we know we're getting closer to an equilibrium between supply and demand, transportation will probably be the first area where we'll start to see that," he said.

"We're definitely going to carry through Q1, I think that's very clear. The question is to Q2 and a majority of people will say 'yes,' that's going to continue," he said. "Shipping is not improving yet."

The ISM's price index reversed a three month streak of softening and increased to 81.2 in September from 79.4, while still indicating the 16th consecutive month of expansion. The survey showed an increase in firms expecting higher prices to 69.5% from 62.8%, but also an increase in firms expecting declining prices to 7.1% from 3.9% the previous month.

"There's no real sign that price pressures are going to abate, given the new order levels, but you may see some price relief over the medium-term."