U.S. factories report rising backlogs and stagnant shipments as freight, diesel, and steel prices climb, impacting production and supply chains.
In August, unfilled orders at U.S. factories increased by 0.6% to reach $1.6096 trillion, according to the latest report from the Census Bureau on manufacturing shipments, inventories, and orders released on October 2. This marks a concerning trend, with backlogs showing an upward trajectory in 25 of the previous 26 months. Transportation equipment leads the way, constituting a substantial portion of this total with $1.0099 trillion attributed to this category alone, highlighting the sector's growing reliance on manufacturing capacity.
Meanwhile, shipments remained relatively stagnant, recorded at $658.6 billion—this was the first instance of no growth after a series of eight consecutive monthly increases. New orders saw a slight uptick of 0.1%, bringing them to $663.5 billion. Furthermore, the ratio of unfilled orders compared to shipments has escalated from 6.81 to 6.87, indicating a significant gap in manufacturing output versus demand, though it's crucial to note that these figures aren't adjusted for inflation.
Drilling down into specific sectors, orders for motor vehicle bodies, parts, and trailers increased by 0.8%, while machinery orders grew by 1.1%. Notably, nondefense capital goods orders excluding aircraft rose by 1.6%. However, the durable goods sector experienced a decline, with overall orders down by 0.1%, specifically driven by a 0.7% drop in transportation equipment and a notable 4.3% reduction in orders for nondefense aircraft and parts.
The Institute for Supply Management (ISM) noted that one fabricated metal products company cited persistent challenges in meeting demand due to a crippling labor shortage that hinders production output. Another major issue is the general availability of steel, which is becoming increasingly scarce, leading to further production delays as their supply chain grapples with material shortages.
Rising Freight, Diesel, and Steel Costs
The ISM's manufacturing index recorded a reading of 54.5 in September, a slight decrease of one-tenth of a point from August, yet it still indicates expansion for the ninth consecutive month after experiencing a prolonged contraction. A significant detail in the report was the prices index, which jumped 6.8 points to 77.9, reflecting rising costs. A survey revealed that 58.6% of participants reported higher prices, a stark increase from the previous 46.2% reported in August.
Freight costs have been climbing for seven consecutive months, with diesel fuel reporting its second month of price increases. The Energy Information Administration noted that the benchmark diesel price soared to a staggering $6.529 per gallon as of September 21, a figure frequently used for calculating fuel surcharges.
According to Susan Spence, chair of the ISM's Manufacturing Business Survey Committee, the prices index is being poorly affected by several factors: steep increases in steel and aluminum prices, tariffs on numerous imported goods, and additional costs associated with petroleum-based products due to geopolitical tensions. Feedback from a respondent in the food, beverage, and tobacco sectors confirmed that rising fuel prices significantly impact transportation and overall product costs.
Moreover, a machinery industry participant pointed out that rising interest rates are slowing down new construction projects, prompting manufacturers to confront the escalating cost of components sourced from overseas due to tariffs and increased freight charges.
ISM's inventories index fell to 48.6 in September, indicating a contraction in inventories, while the customers' inventories index dropped to 41.6, marking its 24th month below optimal levels. Spence explained that such prolonged low readings generally indicate positive signs for future production, suggesting that demand continues to outstrip inventory levels.
Impact of Canada Tariffs on Imports
Recent trade data shows that the U.S. goods deficit with Canada increased by $4.1 billion to $7.1 billion, driven by a rise in imports from Canada that surged by $4.6 billion to a total of $37.1 billion. Notably, on September 8, Canada imposed retaliatory tariffs ranging from 15% to 50% on approximately C$27.6 billion of U.S. goods as a countermeasure to U.S. tariffs, further straining supply chains already under pressure.
Industry respondents have voiced concerns about how these Canadian tariffs disrupt carefully cultivated supply chains, creating heightened uncertainty in the market at a time when clear cost structures are needed for purchasing decisions. This uncertain landscape is leading to customers delaying capital expenditures until market conditions stabilize.
In August alone, goods imports experienced a remarkable increase of $17.2 billion, reaching $342.2 billion, which subsequently widened the goods deficit to $136.6 billion. The rise in industrial supplies accounted for a large portion of this increase, with crude oil alone contributing $3.3 billion and nonmonetary gold about $3.1 billion. Additionally, capital goods imports rose by $6.2 billion, driven partly by semiconductors and other machinery.
Despite the 4.1% increase in real goods imports, concerns continue over the potential long-term effects of the ongoing trade war with Canada. Feedback from the transportation equipment sector indicates this situation is likely to further increase prices and complicate supply chains, which could impact production timelines moving forward.
The disruptions and escalating costs we see today suggest that manufacturers need to closely monitor their supply chains, prepare for continued volatility, and adjust operations accordingly to align with the prevailing economic dynamics.
