MNI INTERVIEW: Supply Jams Could Linger For Years - ISM Chief

The international supply chain crunch now looks likely to persist well into next year and could linger for years as the surging Delta variant clogs ports critical to global trade and forces factory shutdowns in parts of Asia, Institute for Supply Management manufacturing chair Tim Fiore told MNI Tuesday.

Still, strong U.S. demand leaves room for further growth in the manufacturing sector over coming months, he said.

"I don't think that we're going to cleanly get away from virus impacts and people getting sick and not coming to work. I think we're going to be dealing with this obstacle now for what could be a couple years, but we're able to deal with it," Fiore said, projecting confidence about the American manufacturing sector.

"We knew from a year ago that one of the big headwinds to U.S. manufacturing expansion would be our international partners. And it's clear at this point that is one, especially on the discrete manufacturing side," he added, pointing to surging cases of Delta in Southeast Asia and the lack of vaccines, and backlogs at major international ports.

SHIPPING COSTS

August's ISM report continued to show demand outpacing supply capacity with the headline index coming in slightly above expectations at 59.9, up from last month's 59.5. The production index rose to 60.0 from 58.4, backlogs were at the second highest in history at 68.2, and customer inventories were up to 54.2, he said.

But increased transportation costs will remain and port backlogs could take until at least early 2022 to begin to be straightened out, he said. "Ocean freight shipping backlogs will stay with us until at least February next year, and the fact that we don't have enough vaccines to vaccinate the world nor the will to do that will mean that we will have these pop-ups and issues for some time."

Still, Fiore said he felt even more comfortable calling the manufacturing price gains peak in June, again saying he agrees with the Federal Reserve's viewpoint on "transitory" inflation, but added there are some prices that are permanently higher.

(See MNI: Supply Kinks Strain 'Transitory' Price Surge--Fed Economist)

"Any of these partially fungible products, plastic wrap, plastic resins, do I think they'll get back to their pre-pandemic normal price? Probably not. I guess you could call that really inflation. But we'll get back at some point. I just don't see it happening in this manufacturing economic cycle," he said, also seeing some risk of price increases due to Hurricane Ida in the next 6 weeks.

The ISM's price index dropped 6.3 points to 79.4 in August, still the 15th consecutive month of expansion. But the August survey showed the number of firms reporting higher prices dropping again to 62.8%, down from 84.8% in June, while 33.3% saw no change and 3.9% registered declining prices.

SLOWER EMPLOYMENT REBOUND

The ISM report also showed employment falling despite high demand, with the index hitting 49.0 from 52.9 in July. Labor gains will continue in the months ahead, he said, but those increases are likely to be at a slower pace than previously thought as the Delta variant slows hiring.

Fiore said he expects the ISM's employment index reaching the mid-50s later in November or December. "I don't think we're gonna see it hit 60 before the end of the year," he said, also expressing some concern over risks of imbalances hitting employment later on.

"The biggest risk right now is if that new order level is inflated, because of pushed out lead times, and if demand starts to weaken and those new orders levels collapse, then there'll be a big increase in inventories. Supplier delivery numbers will drop and you'll get into this really unbalanced environment," he said.

"If that happens, then the demand for new employees will erode too," he said, estimating that 4 percentage points of the New Orders index at 66.7 in August may be "all artificial."