2 October - 8 October

US Manufacturing Falls To The Lowest Level Since May 2020

Spotlight on the slow growth of the US manufacturing sector in response to cooling demand.

Highlights on increased diesel prices in California while they stay normal in Florida, the US imposing a chip-choke on China, and more.

Trending discussion on why shortages of basic goods still persist in the US, 2.5 years after the pandemic hit. 

Your Weekly Spotlight

As inflation hits various parts of the world, experts observe a dip in consumer demand. Amidst a cash crunch, economies are finding various ways to stave off inflation. As a result, the manufacturing sector in the US has been hit strongly with production slowing down. In fact, the US manufacturing activity grew at its slowest pace in nearly two and a half years in September as new orders contracted, while interest rates were aggressively hiked to cool demand and tame inflation.

The Institute for Supply Management (ISM) said on Monday that its manufacturing purchasing managers’ index, or PMI, dropped to 50.9 in September, the lowest reading since May 2020, from 52.8 in August. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the US economy. 

To deal with inflation, the US Federal Reserve has hiked its policy rate from near zero to the current range of 3% to 3.25%, and last month signaled more large increases were on the way this year. Container shipping prices have also dropped drastically due to these interest rate hikes. With higher borrowing rates, spending on big-ticket items like appliances and furniture is dropping, as these are usually purchased on credit. 

The ISM survey’s forward-looking new orders subindex fell to 47.1 last month, also the lowest reading since May 2020, from 51.3 in August. It was the third time this year that the index has contracted. Order backlogs are also being whittled down. While that pointed to a further slowdown in manufacturing, it was also a function of easing bottlenecks in the supply chain. As a result, manufacturing activity is slowing down.

Key Takeaway

As inflation results in decreased demand, retailers are focusing on disposing of existing inventory before the holiday season hits us in earnest. Manufacturing is likely to be hit negatively across the US as the big players look at selling excessive inventory first, as the ISM findings show. Some of the slowdowns in manufacturing reflect the rotation of spending from goods to services. 

A measure of prices paid by manufacturers dropped to 51.7, the lowest reading since June 2020, from 52.5 in August. The continued slowdown is being driven by retreating commodity prices. Despite a slowdown in the manufacturing sector, ISM findings report that there were 11.2 million unfilled jobs across the US economy at the end of July, with two job openings for every unemployed worker. 

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Trending

The pandemic ensures large disruptions in supply chains across the globe. 2.5 years after the onset of the pandemic, most systems seem to return to normal, but shortages of basic goods still persist across the US

Baby formula, wine and spirits, lawn chairs, garage doors, butter, cream cheese, breakfast cereal, and many more items have been in short supply in the U.S. during 2022 – and popcorn and tomatoes are expected to be in short supply soon. Car buyers may have to wait 6 months to get access to specific models. Supplies of Sriracha sauce have been running low, and cat and dog food are also in short supply. 

In fact, global supply chains have been under the most strain in at least a quarter-century, and have been pretty much ever since the COVID-19 pandemic began. While each product experiencing a shortage has its own story as to what went wrong, at the root of most is a concept people in my field call the “bullwhip effect.” To understand the term, imagine the physics of cracking a whip. It starts with a small flick of the wrist, but the whip’s wave patterns grow exponentially in a chain reaction, leading to the tip, a snap – and a sharp pain for anyone on the receiving end. 

The same thing can happen in supply chains when orders for a product from a retailer, say, go up or down by some amount, and that gets amplified by wholesalers, distributors, and raw material suppliers. The COVID-19 pandemic disrupted supply chains in a similar manner, with ill effects being felt across various sectors of industry. As a result, long and persistent shortages of specific items still plague our lives.

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