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Delta variant or no, the manufacturing demand crunch won't let up

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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Thursday, September 2, 2021

Demand pressures continue through the summer

For months now, Morning Brief readers have been reminded, time and again, that the economy is in no way suffering from a demand problem. 

And there is nothing in recent data that suggests this trend is abating, even as the Delta variant of COVID-19 continues its march across the globe. 

As happens at the beginning of each month, the Institute for Supply Management (ISM) and IHS Markit each released readings on manufacturing activity for the prior month. And in both reports we saw that the sector continued a robust expansion in August.

"August PMI data from IHS Markit signaled a marked improvement in the health of the U.S. manufacturing sector," the firm said in its report, published Wednesday. "Although slightly softer than that seen in July, the expansion was supported by steep upturns in production and new orders." 

The purchasing managers' index, or PMI, registered a reading of 61.1 in August — a four-month low for the series but still among the strongest this index has seen over the last 14 years. Any reading above 50 indicates the manufacturing sector is expanding; readings below 50 indicate contraction. 

In the ISM's report, Tim Fiore, chair of the Institute's manufacturing business survey committee, said "panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand." The ISM's PMI hit a reading of 59.9 for August, up from July's reading of 59.5. 

"All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products," Fiore added. However, he also noted familiar themes — specifically a shortage of workers and ongoing global supply bottlenecks — are converging with the relentless pandemic.

"The new surges of COVID-19 are adding to pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — that continue to limit manufacturing-growth potential. However, optimistic panel sentiment remained strong, with eight positive comments for every cautious comment," Fiore added.

So while recent weeks have brought us a mixed bag of data on consumer health, while expectations for Friday's jobs report are for more modest gains in August, what the production side of the economy continues to signal is that this expansion remains alive and well. 

The current backdrop is imperfect — supply chain pressures, labor and materials shortages, and higher costs remain volatile inputs for producers trying to manage forward order books. But the order books remain full and growing. 

Or, as Fiore said Wednesday, "demand remains at strong levels, despite increased prices for nearly everything."

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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