Demand for Goods Grows: Will Manufacturers Be Able to Meet It?
Early in 2020, as the COVID-19 pandemic led to shutdowns around the world, some manufacturing operations were temporarily halted or disrupted, and many manufacturers had a backlog of orders as they resumed operations and dealt with intermittent employee quarantines in the months that followed. However, demand for manufactured goods remained strong — by June 2020, according to the Bureau of Economic Analysis, consumer spending on goods had well surpassed pre-pandemic levels, and the spending growth has only continued. For the past several months, manufacturers have reported struggling to meet high demand amid long backlog and depleted inventories. Both shortages of goods and delays in receiving goods have been widespread. Responses to the Fifth District Survey of Manufacturing Activity (manufacturing survey) provide further evidence of and insight into the challenges that manufacturers have faced in meeting demand.
Rising Orders, Falling Capacity
Recent results from the Fifth District manufacturing survey reflect increased demand for manufactured goods. The diffusion index for new orders (the share of respondents who report an increase minus the share who report a decrease) has been above zero since May 2020. Ramping up production to meet higher consumer demand has stretched supply chains thin, and survey respondents have continually reported supply chain disruptions that have impacted their ability to maintain necessary inventories and meet demand. The diffusion indexes for backlog of orders and vendor lead times have been elevated since late 2020, and both reached record highs in May 2021.
Production shortages have also been apparent in our survey data through the diffusion index for inventories of finished goods. This index fell below zero in October 2020 for the first time since 2004 and only the second time in series history, indicating that inventories were “too low” for most of our manufacturers. This index has remained in negative territory since this past February. In a special question included in our April survey, 61 percent of manufacturers said they anticipated challenges increasing supply to meet rising demand. In fact, a North Carolina food manufacturer reported that they hoped to see sales volume decrease because they were unable to meet demand and wanted to increase inventories.
One of the challenges manufacturers have faced is finding the inputs they need, thus limiting their production capacity. In response to another question in our April survey, 41 percent of firms reported they anticipated that difficulty procuring inputs would be their biggest obstacle to increasing supply. The diffusion indexes for the share of manufacturers able to maintain sufficient inventories both of raw materials and of finished products reached record lows in July.
Labor Shortages
In addition to increased demand, shortages of inputs, and supply chain disruptions, manufacturers have struggled to find the labor they need. Data from the Bureau of Labor Statistics indicated that in July 2021, employment in the Fifth District manufacturing sector was 25,600 jobs (2.3 percent) below the pre-pandemic (February 2020) level. For several months, survey respondents have been reporting they are unable to find sufficient workers with the necessary skills. While Fifth District manufacturers have reported struggling to find qualified employees for the past few years, the problem was exacerbated in 2020 and continues to trouble employers in 2021.
Throughout the pandemic, many manufacturers have reported increased absenteeism, often resulting from employees quarantining after contracting or being exposed to the virus. In addition, manufacturers have seen employees leave their jobs and have struggled to replace them. In our April survey, 43 percent of manufacturing firms cited difficulty finding workers as their top challenge to increasing supply. In August, 75 percent of manufacturing survey respondents reported having difficulty hiring workers since the spring. Without sufficient labor, employers have in some cases needed to change their policies to retain employees. For example, one firm in our manufacturing panel reported having to relax the company’s attendance policy to avoid terminating a large portion of its workforce. Another firm instituted an attendance incentive program.
Survey respondents have also reported that employees, on average, are working longer hours. In April, the diffusion index for hours in the average workweek reached its highest level since 2004. Firms have also been raising wages to attract workers. In August, the wage index on our manufacturing survey hit a record high. However, firms still reported that it was increasingly difficult to find workers.
Anecdotally, the challenge of finding labor also affects manufacturing supply chains. Many manufacturers have attributed shortages in inputs or packaging materials to labor shortages at the plants of their providers. One respondent, a manufacturer of fabricated metal products, reported a shortage of steel sheets due to idling capacity at domestic steel mills. Firms have also reported that shortages of truck drivers have contributed to transportation delays.
Conclusion
According to Fifth District manufacturers, materials shortages, transportation delays, and other supply chain frictions have limited their ability to capitalize on strong consumer demand and increased orders. As we continue to navigate the challenges brought on by the pandemic, the Richmond Fed’s monthly surveys of manufacturing activity will continue to provide insight into the challenges and opportunities facing the regional and national manufacturing sector.
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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.
