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Supply Chain Disruptions Limited Global Production Growth in September

The J.P.Morgan Global Manufacturing Producers Manufacturing Index (PMI), produced by IHS Markit in association with the Institute for Supply Management (ISM), was subdued by supply chain disruptions and material shortages in September.

Although output growth accelerated for the first time in five months, it remained among the slowest during the current 15-month sequence of expansion. PMI readings were flat for consumer goods.

European manufacturing dominated the top of the growth rankings, with nine out of the 10 best readings, while U.S. manufacturing also performed well. The weaker performances were generally seen in Asia.

United States

September PMI data from IHS Markit signaled a substantial improvement in operating conditions across the U.S. manufacturing sector, although output was the slowest in five months. Despite rising markedly, production was often hampered by severe material and labor shortages, as supply chain disruption worsened, IHS said.

Pressure on capacity was reflected in the fastest uptick in backlogs of work on record, as challenges expanding workforce numbers persisted. On the price front, the pace of input cost inflation softened only slightly from August’s series record, causing firms to raise their charges at an unprecedented rate.

“The U.S. manufacturing sector continues to run hot, with demand once again racing well ahead of production capacity as firms report widespread issues with supply chains and the availability of labor,” Chris Williamson, chief business economist at IHS Markit, said. “The inability to meet demand amid near-record shortages of inputs and labor not only led to an unprecedented rise in backlogs of work as orders sat unfulfilled, but prices charged for those goods leaving the factory gate also surged higher again in September, rising at a rate exceeding anything seen in nearly 15 years of survey history.”

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Williamson said with Covid-19 cases showing signs of having peaked domestically and globally, some of the supply chain and labor shortage issues should start to ease, in turn taking some of the pressure off prices.

“But a dip in manufacturers’ expectations for the year ahead to the lowest for four months due to supply worries underscores how production is likely to be adversely affected by shortages for some time to come,” he added.

Euro Zone

European manufacturers recorded another strong improvement in operating conditions during September, owing to further marked rates of expansion in output, new orders and employment. However, notable slowdowns were seen in all three cases, causing the headline PMI to fall by its largest margin since April 2020 at the start of the pandemic when virus containment measures were being implemented across the currency bloc and globally.

Supply constraints were a key hindrance to production schedules during September, while softer demand conditions were another contributing factor. Shortages of electronic components and raw materials were particularly widespread, while some firms commented on poor container availability and logistical problems arising in parts of Asia.

“Supply issues continue to wreak havoc across large swathes of European manufacturing, with delays and shortages being reported at rates not witnessed in almost a quarter of a century and showing no signs of any imminent improvement,” Williamson said. “Growing supply and transport issues are not only being cited as a major constraint on both production and demand, but also once again drove prices sharply higher in September. With costs rising and factories struggling to produce enough goods to meet customer demand, the average price of goods leaving the factory gate rose at an increased rate in September, accelerating to almost match the record price jumps seen earlier in the summer.”

“The supply situation should start to improve now that COVID-19 cases are falling and vaccination rates are improving in many countries, notably in several key Asian economies from which many components are sourced, but it will inevitably be a slow process which could see the theme of supply issues and rising prices run well into 2022,” he added.

China

The latest PMI data indicated that business conditions across China’s manufacturing sector stabilized in September, after a slight deterioration in August, IHS said. The improved headline index reading was supported by a renewed upturn in total sales and a softer reduction in output.

At the same time, purchasing activity also returned to growth, while confidence toward the year ahead also strengthened. Supply chain delays persisted, however, amid sustained reports of material shortages. This in turn drove sharper increases in both input costs and output prices.

Manufacturers indicated a further lengthening of delivery times for inputs during September. The deterioration in vendor performance was often linked to limited stock availability, transportation delays due to the pandemic and stretched capacity at suppliers.

“The resurgence of the epidemic in several regions and shortfalls in raw material supplies slowed production at manufacturing companies, with the gauge for output contracting for the second straight month in September,” Dr. Wang Zhe, senior economist at Caixin Insight Group, said in the IHS report. “Demand improved, though marginally, with demand for consumer goods in the doldrums. Overseas demand was relatively weak as new export orders largely decreased in September…Global shipping capacity was also clearly insufficient. “

Zhe said entrepreneurs remained optimistic about the business outlook and manufacturing enterprises remained positive about the prospects for the market and for getting the Covid-19 outbreak under control.

“In the coming months, the government should focus on improving epidemic prevention and control and alleviating supply-side pressure,” he added. “It should also find a balance among multiple objectives, such as promoting employment, maintaining the stability of raw material prices, ensuring a stable and orderly supply and meeting targets for controlling energy consumption.”

Vietnam

The Vietnamese manufacturing sector saw a further sharp fall in production during September as the sector continued to be severely impacted by the current wave of the pandemic in the country and the restrictions put in place to try and contain the spread of the virus.

New orders were also down sharply and the rate of decline in staffing levels accelerated, IHS noted. Travel restrictions and ongoing international supply chain disruption resulted in the worst delays for the receipt of inputs on record and contributed to a further sharp increase in input costs.

Temporary business closures, transportation difficulties and staff shortages all contributed to a fourth successive reduction in manufacturing output in Vietnam, and one that remained considerable. New orders also fell sharply, and to the greatest extent since April 2020. Alongside a sharp reduction in domestic new business, firms pointed to a much sharper reduction in new export orders than that seen during August.

“The themes seen in recent months were repeated across the Vietnamese manufacturing sector in September, according to the latest PMI data,” Andrew Harker, economics director at IHS Markit, said. “Firms again faced huge restrictions on their ability to produce, leading to a steep fall in employment and a surge in backlogs of work following a sustained period of reduced output. On a more positive note, there are signs that the latest wave of the pandemic has peaked and vaccination programs are making good progress. If cases continue to trend down and restrictions are eased, then firms should be able to see growth resume over the final quarter of the year.”

Mexico

Manufacturing sector conditions remained difficult in September, with the latest PMI data pointing to ongoing declines in new orders and output, IHS said. In addition to linking the downturn to a challenging market environment and subdued demand, some panelists surveyed noted having to shut down their factories due to heavy rain and the pandemic. More jobs were shed and there was another reduction in input buying.

Although companies suggested that global shortages of raw materials continued to push up purchasing prices, the overall rate of input cost inflation softened to an eight-month low.

“Manufacturers in Mexico continued to report many struggles in September, with production falling due to subdued sales volumes and raw material scarcity,” Pollyanna De Lima, economics associate director at IHS Markit, said. “PMI data for September showed that order book volumes shrank further, which in turn led companies to reduce headcounts. The downturn in demand at least showed signs of abating. Global shortages of raw materials remained a key theme of the survey, with Mexican firms indicating that this restricted input buying, dragged down their inventories and pushed up purchasing costs… There were revived hopes among goods producers that production could expand in the coming months, evidenced by an uptick in business optimism.”

India

The recovery of the Indian manufacturing industry was extended to September, as companies benefited from strengthening demand conditions amid the easing of Covid restrictions. With sales rising at a stronger rate, firms scaled up production and purchased additional inputs.

There was also a faster upturn in international sales and an improvement in business confidence. Price pressures, which receded in each of the prior two months, intensified in September due to lingering shortages of raw materials as well as higher fuel and transportation costs.

“Indian manufacturers lifted production to a greater extent in September as they geared up for improvements in demand and the replenishment of stocks,” De Lima said. “There was a substantial pick-up in intakes of new work, with some contribution from international markets. After subsiding in each of the previous two months, cost inflationary pressures intensified in September. Strong demand for scarce products contributed to the increase in input costs, as did rising fuel and transportation rates.”