Economic Report: U.S. manufacturers flooded with demand, ISM finds, but output handcuffed by labor and supply shortages

The numbers: American manufacturers have been flooded with new orders for cars, computers, furniture, appliances and all sorts of goods, but they are struggling to keep up amid widespread shortages of supplies and labor.

The Institute for Supply Management said its manufacturing sector index rose to 61.2% in May from 60.7% in April, largely because of an increase in new orders.

Yet production and hiring actually slowed and companies fell further behind in filling new orders, the institute said.

The increase in the ISM index exceeded Wall Street expectations. Economists surveyed by Dow Jones and The Wall Street Journal had forecast the ISM index to edge up to 60.7%.

Readings over 50% signal that companies are expanding, and numbers above 60% are viewed as exceptional.

Big picture: The U.S. economy is recovering so rapidly from the coronavirus pandemic that it’s putting a big strain of many companies. They’re having a harder time finding materials or workers to fill a record number of open jobs.

The shortages have triggered a sharp increase in inflation and in some cases have forced companies to scale back production.

Most of these problems are expected to ease once the economy is fully recovered, but it’s unclear how long it will take or whether there will be long-lasting side effects such as a higher level of inflation.

The shortage of labor has been a particularly big surprise with unemployment still quite high. Closed schools, a lack of daycare options, a lingering fear of the virus and generous pandemic unemployment benefits have all been blamed.

Key details: A measure of new orders rose a few points in May to 67% and stood close to a 17-year high.

Yet a gauge of production fell by 4 points to 58.5% and new hiring almost came to a halt. The employment index slid to 50.9% from 55.1% and hit the lowest level since last November.

Many companies say they simply can’t find enough workers. Here are some of the comments:

—“We are struggling to find employees to help us keep up,” said an executive at a computer company.

—“Difficulty finding workers at the factory and warehouse level is not only impacting our production, but suppliers’ as well,” said an executive at a food manufacturer.

—A “lack of qualified candidates to fill both open office and shop positions is having a negative impact on production,’ said a manufacturer of fabricated-metal parts.

“Business is good, but labor and raw materials are becoming very problematic, driving increases in costs,” said an executive at a furniture maker.

What they are saying? “The main takeaway from the release is that shortages of workers, and not just raw materials, now appear to be a growing problem that could weigh on production in the coming months,” said Michael Pearce, senior U.S. economist at Capital Economics.

Market reaction: The Dow Jones Industrial Average

and S&P 500

both rose in Tuesday trades.

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