Manufacturers Could Soon Face Demand Woes on Top of Supply-Chain Snarls

A shift in spending away from goods could hit companies already struggling to secure supplies.

By guest author Justin Lahart from the Wall Street Journal

Supply-chain problems are a bear, but they are better than the alternative of waning demand. The worry for some manufacturers has to be that the latter might become a live concern in the months ahead.

The Institute for Supply Management on Monday said that its index of manufacturing activity slipped to 55.4 in April from March’s 57.1. That is still solidly above 50—the dividing line between growth and contraction—but marked the lowest level since July 2020. Moreover, the index got a boost in April from a slowdown in supplier deliveries, which is usually a positive sign for manufacturing, but in the context of ongoing supply-chain issues counts a negative. It was at an elevated 67.2 versus 65.4 in March.

Manufacturing growth could further moderate in the months ahead, in response to shifts in demand. The easing of the pandemic has led to a shift away from spending on many types of manufactured goods toward services. Commerce Department figures released last week showed that, adjusted for inflation, consumer spending on furnishings, appliances and other household equipment in the first quarter was 5.1 % below its year-earlier level. Spending on restaurants, bars and other food services was up 19.5 % over the same period, while spending on hotels and motels was up 49 %.

With warmer weather beckoning and worries about Covid-19 continuing to fade, the move back toward more services spending might only accelerate in the months ahead. Further, the high level of spending on some goods categories has probably reduced a lot of pent-up demand. And the fact that inflation in goods has been steeper than inflation in services might lead people to reconsider some spending trade-offs—appliance prices have gone up a lot more since before the pandemic than prices for hotel rooms, for example, so a hotel stay could seem more worthwhile.

How shifts in spending will affect manufacturers will depend on what they are making. Demand for new cars, for example, doesn’t seem close to sated in comparison with categories such as mattresses. Moreover, inventories are still very low, so parts and components manufacturers, in particular, might continue to see strong demand as their customers stock up. In April, 36.3% of manufacturers responding to the Institute for Supply Management’s survey said customers’ inventories were too low, versus just 10.5% who said they were too high.

Factories’ day in the sun isn’t over just yet, but they might be closer to dusk than to dawn.

















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