Economics
February 1, 2022
Economic Indicator
The Omicron wave weighed on manufacturing activity in January amid a pullback in demand and increased absenteeism in the workplace. Despite these headwinds, the ISM manufacturing report continued to signal incremental thawing of supply problems. Manufacturers seem to have somewhat of an easier time securing inputs, but finding the help they need remains a severe challenge.
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| Source: Institute for Supply Management and Wells Fargo Economics |
The ISM manufacturing index slid 1.2 points to 57.6 in January (chart). While current activity was weaker amid a 1.2 point drop in the production component, the 3.1 point decline in new orders suggests some pullback in demand as well. The declines in January brought both of these components to their lowest levels in over a year and a half, signaling weaker activity in the sector (chart).
That said, the decline in production activity likely would have been even larger if it weren't for the 6.4 point drop in the backlog of orders, which suggests manufacturers were still able to chip away at backlog last month despite Omicron-related headwinds. This was the largest drop in the backlog component since the lockdowns in April-2020 and supports the notion that supply chain problems are somewhat easing (chart).
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| Source: Institute for Supply Management and Wells Fargo Economics |
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| Source: Institute for Supply Management and Wells Fargo Economics |
Comments from purchasing managers in the survey were mixed, but all continued to reference supply difficulties constraining production. Even so, the supplier deliveries component slid an additional 0.3 points in January after a 7.3 point decline a month prior (chart). Improved delivery times are particularly encouraging in January when Omicron was thought to have worsened supply issues. Taken together with the decline in reported backlog, we take these developments as a signal that manufacturers have found it somewhat easier to procure inputs, although smooth functioning supply chains still remain some ways off.
At the same time, the lack of labor remains a persistent issue for manufacturers. One respondent from the Computer & Electronic Products' industry said, “While there has been some improvement in materials making it to our factories and logistics centers, we are still constrained by (a lack of) qualified labor. Orders so far are not being cancelled, but we are concerned that customers may be losing patience.”
The employment index rose 0.6 points to 54.5 in January signaling an expansion in hiring, but the lack of labor amid businesses is clear across measures of supply. Further exacerbating the difficulty securing help is that COVID is limiting the existing workforce. Anecdotal and survey evidence suggest Omicron caused increased absenteeism during January. According to the household pulse survey ending January 10, there were 8.8 million workers not working because they were sick with or caring for someone with COVID. That was the highest since the survey started in May 2020 and exceeded the previous peak, set in January 2021, by over two million (chart). Increased absenteeism is partly behind our expectation that overall hiring in the U.S. declined by 100K in January.
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| Source: Institute for Supply Management and Wells Fargo Economics |
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| Source: U.S. Department of Commerce and Wells Fargo Economics |
While there is some evidence supply problems are abating, manufacturers still struggling to obtain all the necessary inputs to produce, whether that be physical products, labor or both. Price pressure has remained red-hot as a result. After declining a whopping 14.2 points in December, the prices paid index reversed more than half of that decline and jumped nearly eight points in January to 76.1 (chart). The continued strain on inputs will keep pressure on prices for some time, while competitive wage gains amid the constrained labor supply will also keep the heat turned up on the overall pricing environment.
The third consecutive monthly decline in the ISM manufacturing index in January signals weaker but still-strong activity in the sector (chart). But, we believe this weakness will partly be temporary. The Omicron variant has shown some signs of subsiding just as fast as it appeared. New daily cases seem to have peaked and the national hospitalization rate looks to have rolled over. Further, even if demand continues to subside in the near-term as the service sector gains more considerable momentum, the expansive backlog of orders means manufacturers will be busy with plenty of product to still deliver on.
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Economics Group
Jay H. Bryson, Ph.D. | Chief Economist | 704-410-3274 | Jay.Bryson@wellsfargo.com |
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All estimates/forecasts are as of 2/1/2022 unless otherwise stated. 2/1/2022 11:13:33 EST. This report is available on Bloomberg WFRE
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