MNI INTERVIEW: US Service Wages Limit Mfg Production-ISM Chief

Increasing wages in the service sector are luring workers away and limiting U.S. manufacturing production, Institute for Supply Management manufacturing chair Tim Fiore told MNI Thursday, adding that hiring has been difficult but appears to be easing and employment should pick up in September as jobless benefits across the country come to an end.

June's ISM report continued to show demand outpacing supply capacity with the headline index slipping to 60.6 from 61.2, slightly missing expectations. The production index rose to 60.8 from 58.5, backlogs are still near record highs at 64.5, and customer inventories are near lows at 30.8, Fiore said.

But the ISM report also showed employment falling despite high demand, with the index hitting 49.9 from 50.9 in May, the first sub-50 figure after 6 consecutive monthly expansions. "We still struggle and we're struggling to hire people, no doubt about it," he said.

Fiore however added that hiring conditions for businesses may have eased, with 36% of firms indicating they're having difficulty hiring, down from 50% last month. Expressing further optimism, he said hiring should also accelerate in the months ahead as boosted federal unemployment benefits trickle to an end in states across the country with a nationwide end in early September.

REFUSING WAGE HIKES

The ISM report also showed over half of businesses noting employee turnover due to workers finding higher wages in other places and sectors, Fiore said. "There's pressure on the service side putting pressure on the low-end, low-skill level of the manufacturing side."

But manufacturers do not look set to compete with the service sector and raise wages, he added, in part because manufacturers believe a market equilibrium is coming in the third quarter, commodity and product prices should begin to cool going into year-end, and some concerns they could get caught flatfooted with those costs if the market softens more than expected.

"I get a lot of comments about doing it, but the reality is that people are kind of exhausted on it," he said about raising wages. "Businesses are saying they are only going to go so far and they're not going to go any further."

"They're going to output as much as they can output given the workforce," he said. "They're not going to raise the wages to steal people from down the street and have those people get stolen from them."

When market conditions normalize and Americans reenter the workforce, there'll be less pressure on wage growth, he said, and businesses will be more willing to reconsider. "The feeling now is when more people enter the workforce, then we'll get more to a proper balance on labor prices."

PRICE PRESSURES WIDENING

The Institute for Supply Management's price index rose 4.1 points to 92.1 in June, the 13the consecutive month of expansion and the highest reading since a 93.1 print in 1979. The balance of opinion showed 84.8% of respondents seeing higher prices, 14.5% seeing no change, and 0.7% report seeing declining prices.

"Its kind of alarming to see nearly everyone seeing higher prices," he said, adding that pricing power continues to be in the hands of suppliers and expressing confidence that prices are near a peak.

How businesses plan for 2022 is going to be interesting, he said. "Everything that I've seen so far is that they're being very conservative, and people are believing that this is going to continue through 2022 from the standpoint of high prices and high labor costs."