Manufacturing continues to lead economy out of pandemic downturn

Performance reports show that the manufacturing industry is a strong V-shaped recovery and continues to carry the economy out of the pandemic downturn. The metal fabrication sector remains a top-performing sector. Getty Images

There’s no other way to put it: Manufacturing is having a hell of a great start to 2021 despite the on-going COVID-19 pandemic.

According to data from several key industry indicators, the first two months of the year have far exceeded performance expectations and illustrate that sectors, especially metal fabricating, are continuing to play a significant role in carrying the economy out of the pandemic downturn.

January and February PMI calculations from the Institute for Supply Management (ISM) and IHS Markit all point towards consistently strong industry expansion.

“Another month of strong production growth suggests that the U.S. manufacturing sector is close to fully recovering the output lost to the pandemic last year,” IHS Markit Chief Business Economist Chris Williamson said, “and a renewed surge in optimism suggests the recovery has much further to run. Business expectations about the year ahead jumped to a level only exceeded once over the past six years.”

While Markit’s PMI averaged 58.9% in the first two months of 2021, ISM’s reports have pointed towards even more industry-wide growth.

ISM’s PMI jumped from 58.7% in January to 60.8% in February, which bested the 58.9% estimate by almost two percentage points. It’s the ninth straight month of market expansion following spring’s historic contraction. And not only is it ISM’s highest PMI since August 2018, it’s only the seventh time since 2004 that the PMI has reached 60.8% or better.

“We blew by expectations,” ISM Manufacturing Business Survey Committee Chair Timothy Fiore said during his monthly appearance on Manufacturing Talk Radio. “We’re absolutely leading the U.S. economy out of the postpandemic doldrums. 60.8 is just really super strong.”

Metalworkers Still Doing Their Part

The metal fabricator products sector has been the No. 1 or No. 2 performing segment on ISM’s Report on Business for the past four months now. In February, the sector expanded strongly in several subindexes, including new orders, production, employment, and backlog of orders.

That’s all despite shops being faced with record-high prices in steel, aluminum, and other materials, not to mention the logistical issues some mills are dealing with as demand has increased over the past several months.

“Overall capacities are full across our industry,” an anonymous metal fab panelist said in February’s report. “Logistics times are at record times. We’re continuing to fight through shipping and increased lead times on both raw materials and finished goods due to the pandemic.”

An anonymous primary metal panelist on the report added this: “We have seen our new-order log increase by 40% over the last two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule.”

But even with high material costs, Fiore said all indications show that manufacturers are going to continue to pay up in order to keep shops and factories running in a hot manufacturing economy. And he even expects substantial profits to be there in the second half of 2021.

“As a supply person, I kind of hate it. As a businessperson, I love it because I know it means more profitability for my company,” he said. “I think 2021 is going to be an improved profit margin year compared to 2020. It all bodes well for big companies and small companies alike once they get through this initial pain of having to agree to expedited charges and high prices from the steel mills.”

Expansive Cycles and Outlook

This is the sixth expansive manufacturing cycle since 2000. And compared to those previous cycles, this current one is somewhat uncharted territory based on the sharp V-shaped recovery. There’s hope this expansion cycle sticks around for at least the next 18 months like the previous one a couple of years ago.

“I love that deep V; we collapsed and jumped right back up” Fiore said. “This is probably the highest-quality expansion we’ve had in 20 years. If you look at the other cycles, we don’t’ have anything that approaches this. We haven’t ever really migrated our way through this stuff before.”

There’s even anticipation that March will perform even better than February for the manufacturing industry. But that just depends how the petroleum and coal products sector responds. It was the only one of ISM’s six biggest industries that moderately contracted last month.

“I think March is going to be much stronger because we saw signs at the tail end of February that petroleum and coal products are coming back,” Fiore said. “With oil prices over $60 and the other sectors staying strong, this thing could go well beyond 60.8%”

Global Expansion

It wasn’t just the U.S. manufacturing industry that has seen a recent boon; the expansion is globalized, with the manufacturing PMIs of nearly every sector in the world hovering above or just under that 50% threshold. The only exception is Mexico at 44.2%.

“This was a strong manufacturing report,” said Keith Prather, economist and managing director at Armada Corporate Intelligence, “and evidence that when the global economy does emerge from the pandemic and lockdowns during wave 3, the global economy will likely sharply recover–more of a bullwhip.”

It’s no surprise that five of the six big sectors, including metal fabricated products, all expanded more than 60%, which is what ultimately pushed ISM’s overall PMI to almost 61%. Looking at February’s report from a demand, consumption, and input standpoint, there’s a lot to be optimistic about.

The New Orders Index grew 3.7% from January to 64.8%, with New Export Orders also growing 2.3% to 57.2. The Backlog of Orders Index jumped to a decades-high level of 64%. And even though the Customers’ Inventory Index remained at a “too low” level of 32.5%, Fiore said there’s evidence for potential improvement.

“That means our panel companies are not able to fill the shelves of customers,” he said. “That’s been going on for a long time, but it also indicates there’s opportunity for future shipments. That beautiful backlog number really makes you feel good about the future.”

Manufacturing Production and Employment

Then on the consumption side, the Production Index also expanded a significant 2.5% to 63.2%. And although manufacturers, like most industries, have struggled with keeping workers at full capacity, the Employment Index managed to jump 1.8% to 54.4% in February.

“The key number on our comment survey was that we had a 31-1 hire-to-fire ratio,” Fiore said. “We had 31 companies looking to hire and only one company firing. That’s up from 4.5-1 the prior month. So, no doubt people are trying to hire, even on the supplier side.”

Even with a small uptick in hiring, the pandemic combined with the ever-present skills gap has driven small and medium-sized manufacturers to face a new normal for shop floor operations. A recent survey from the Manufacturing Institute’s Center for Manufacturing Research shows a few key workforce findings:

• More than 77% expect to keep struggling to identify talent in 2021 and beyond.
• Nearly 64% have re-evaluated what work can be done remotely where possible.
• More than 83% have enhanced workplace safety measures and requirements.

“The survey … reveals the diverse ways that small and medium-sized manufacturers have adapted to the pandemic—and what they expect in the coming months,” said Center for Manufacturing Research Director and National Association of Manufacturers Chief Economist Chad Moutray. “It captures manufacturers, in their own words, describing the future of everything from virtual work and flexible schedules to new product lines and price pressures.”