Manufacturing industry enters 2021 on a strong note

For the third straight month, metal fabricators have staked claim as the top performing manufacturing sector. The industry enters 2021 on the back of the highest PMI in two and a half years. Getty Images

All things considered, the transition into the new year couldn’t have gone any better for the manufacturing industry. And the metal fabrication sector is leading the way.

In what’s been a positive trend the past few months, the Institute for Supply Management (ISM) recently released data indicating that the industry continues to expand at an impressive rate despite the ongoing pandemic.

The December ISM Report on Business shows a robust 60.7% PMI, which is up 3.2% from the previous month, and the eighth consecutive month of expansion after deep contractions during the spring.

“We didn’t really hit our stride until August and haven’t looked back,” ISM Manufacturing Business Survey Committee Chair Timothy Fiore said during an appearance on Manufacturing Talk Radio earlier this month. “This has all happened in six months. It's just an incredible story. We're now running at a level that we ran at in the last expansion cycle, which was 2016 to 2019.”

That coincides with data from IHS Markit, which posted an expanding PMI of 57.1% in December, and the Federal Reserve, which reported that industrial production rose 1.6% to close out 2020. Both indicators remain below their pre-pandemic levels, however.

Not only was the 60.7% the high for 2020, it was the first time the PMI had surpassed 60% since August 2018. And that’s quite a swing compared to where we were last year at this time, when the PMI was well below the 50% threshold at 47.8%. On top of that, it was the strongest December in almost 20 years, according to historical PMI data from ISM.

“This is a reflection of how we ended 2020, that nasty year of uncertainties,” Fiore said. “We outperformed the 57% estimates. And all sub-indexes are cranking along really well.”

One that really stands out is consumption, which is measured by the Production Index and the Employment Index. Combined, they contributed 7.1 percentage points to the December PMI.

Production’s 64.8% was the sub-index’s best reading in a decade after a 4% jump from the prior month. And even though the Employment Index increased 3.1% to return to expansion territory at 51.5%, there are still inconsistent labor issues and supply chain bottlenecks. The current U.S. unemployment rate sits as 6.7%, while unemployment claims reached 965,000 last week. Of course, that’s mostly due to on-going COVID-19 concerns and delays in vaccine distribution.

“Those labor problems are continuing,” Fiore said. “They're not getting better. There are a lot of inefficiencies down the entire supply chain. Last-minute demands and late deliveries lead to expedited freights and trucks.”

The transportation equipment sector in particular has been overstressed. The sector’s anonymous panelist noted this on the ISM report: “COVID-19 outbreaks are causing supply chain issues for Tier-1 and Tier-2 suppliers. More work needs to ensure suppliers keep us in the loop with any problem in their supply chain. But end-customer demand for products is keeping production and future outlook positive.”

The silver lining, though, is that manufacturing demand is still sound. The New Orders Index rose 2.8% to 67.9 in December.

“That’s a very strong reading and a good indication of future growth in a normal economic cycle,” said Keith Prather, economist and managing director at Armada Corporate Intelligence.

Metal Fabrication No. 1 Once Again

It’s no secret that manufacturing has historically been the industry to carry the most weight when it comes to leading the overall economy out of downturns. And this economic recovery in the COVID-19 era is no different. All six of ISM’s major industry sectors, which make up about 70% of the manufacturing economy, expanded.

“You can almost theorize that with people not being able to spend their money on services like restaurants and entertainment, money is really heading into durable goods,” Fiore said. “And not just durable goods, but goods in general. Although we have headwinds on the commercial aerospace side and on the commercial real estate side, the other sectors are more than making up for it.”

And while it was noteworthy that the petroleum/coal products sector expanded after a sharp contraction in November, the big story comes from the fabricated metal products sector.

For the third month in a row, metal fabricators have staked claim to the top-performing sector.

“Current business outlook is strong through the first quarter of 2021,” the anonymous metal fab panelist said in the report. “We are anticipating 20% growth in sales for 2021.”

The sector, which makes up about 7% of manufacturing GDP, reported growth across the board. Notably, it was the No. 1 expanding sector on the Production Index and was one of only three sectors to expand on the Employment Index. And even though overall growth in New Export Orders slowed slightly in December, metal fabricated products expanded with strength.

“The sector has had three strong months of expansion,” Fiore said. “New export orders are in strong expansion territory. It had really good production output with a percentage in the high 60s, and new orders were in the high 60s.”

But metal fabricators also saw supplier deliveries at 80%. According to ISM, a reading below 50% indicates faster deliveries, while a reading above 50% indicates slower deliveries. The blame is mostly on issues surrounding steel/aluminum supply chains and prices.

“As you know, steel capacity is not where it's supposed to be compared to a year ago,” Fiore said. “And there are a lot of steel shortages causing a lot of the supplier delivery issues."

With steel in tight supply and mills slowing capacity, hot-rolled steel prices have reached an all-time high at $1,080/ton. According to data from Steel Market Update, new capacity isn’t expected to impact the market until later in the year.