Electronics Leads June Expansion Amid Supply Chain Woes

Electronics Leads June Expansion Amid Supply Chain Woes

The computer and electronics industry fueled U.S. manufacturing expansion in June but continues to struggle with shortages, price hikes and logistics bottlenecks, procurement managers told the Institute for Supply Management (ISM). Components are by far the biggest challenge, one buyer said, with lead times going from 16 weeks to 52-plus weeks.

“Processors are a critical shortage, leading to us working 24/7 to redesign printed circuit board assemblies to change components. We are extending our PO coverage over 12 months in many cases and committing to non-cancelable, non-returnable (NCNR) terms to assure supply,” the buyer added.

Although new orders were off from May, electronics production increased in June easing backlog and inventory pressures in the computer market. From the customer standpoint the sector progressed because there was inventory on the shelves, said Tim Fiore, chair of the ISM’s manufacturing survey committee. “That’s consistent with factory output being stronger.”

Electronics led the expansion of the ISM’s six biggest industry sectors in June.

Overall, though, companies and suppliers continue to struggle to meet increasing levels of demand. The ISM’s factory index, the PMI, moderated to 60.6 percent in June, down slightly from May’s 61.2. Any number above 50 indicates expansion.

“Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” Fiore said. “Worker absenteeism, short-term shutdowns due to parts shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

Source: Institute for Supply Management

The index of prices paid by manufacturers jumped to a record 92.1 last month from 88.0 in May  —  the highest level since 1978. Although inflation is viewed as transitory, prices will remain high until supply and demand become more aligned.

“It’s a seller’s market, said Fiore. “Right now businesses are more concerned about securing supply than they are about prices.” Companies have largely been successful in passing costs on to customers, he added.

However, they are less inclined to increase wages. Although turnover is high – workers are leaving their jobs for higher pay elsewhere – it’s hard to reverse raises, Fiore explained. The ISM’s employment index dropped one point in June, from 50.9 to 49.9 percent. Although the labor shortage continues to constrain production, that index grew 2.3 percent in June to 60.8.

There are indications that supply chain pressure may be reaching its peak. ISM panelists said transportation issues eased in June although freight prices remain high. A significant amount of imports were released in the U.S. and inventory wasn’t depleted as quickly as in prior months. New export orders grew 0.8 percent to 56.2 and imports increased 7 percent to 61.0 last month.

ISM’s order-backlog index decreased 6.1 percent from May’s level to 64.5. “If we can just get employees back in the workforce that would improve production and allow supply and demand to recover,” Fiore said.

Panelists remain optimistic, he added, with 16 positive comments for every cautious comment. This is consistent with data recently released by the IPC and McKinsey & Co. Eighty-one percent of McKinsey respondents expect improvements in the global economy in the next six months. At the same time, inflation and supply chain disruptions are more often cited as potential risks to growth.

This year could could end up being the strongest year of growth since the 1950s, said the IPC. What is even more amazing is that growth could arguably be stronger were it not, for supply shortages that are hurting production and
curtailing consumption.