U.S. manufacturing activity picked up in May as pent-up demand amid a reopening economy boosted orders, but unfinished work piled up because of shortages of raw materials and labor.
The Institute for Supply Management (ISM) survey on Tuesday found companies and their suppliers “continue to struggle to meet increasing levels of demand,” noting that “record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments” of manufacturing.
According to the ISM, worker absenteeism and short-term shutdowns because of shortages of parts and workers continued to limit manufacturing’s growth potential.
“Strong demand is a good problem to have, but that demand is increasingly straining manufacturers’ ability to keep pace,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.
The ISM’s index of national factory activity increased to a reading of 61.2 last month from 60.7 in April. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists polled by Reuters had forecast the index rising to 60.9 in May.
A shift in demand to goods from services as the COVID-19 pandemic kept Americans at home strained supply chains, with the virus also disrupting labor at manufacturers and their suppliers, leading to raw material shortages across industries.
More than half of adults in the United States are now fully vaccinated against COVID-19, allowing authorities to lift pandemic-related restrictions on businesses. That is whipping up demand across the economy, as is massive fiscal stimulus. There is no sign the supply bottlenecks are easing, even as demand is reverting to services.
Sixteen manufacturing industries, including furniture, machinery, transportation equipment, computer and electronic products, and electrical equipment, appliances, and components reported growth last month. Only the printing and related support activities industry reported a contraction.
In the computer and electronic products industry, manufacturers complained about poor supplier performance, adding that “demand is high, and we are struggling to find employees to help us keep up.” Similar complaints were echoed across other industries. Food, beverage, and tobacco products manufacturers said “delays at the port continue to strain inventory levels.”
Makers of fabricated metal products reported they did not expect the supply chain constraints to improve “until possibly the fourth quarter of 2021 or beyond”.
Supply challenges are likely holding back the construction sector, with spending on projects rising only 0.2% in April after surging 1.0% in March, a separate report from the Commerce Department showed.