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The IHS Markit's eurozone manufacturing PMI broke new records
for a fourth straight month in a row during June, rising to a new
high of 63.4. The recent growth spurt in manufacturing is therefore
the strongest recorded for at least 24 years.
Expansion marred by rising prices
Both output and new orders rose at some of the fastest rates
ever seen by the survey as demand surged following the opening up
of economies from COVID-19 lockdowns, and as vaccination progress
drove renewed optimism about the future.
However, the good news is tempered by the expansion being
accompanied by unprecedented price rises, in turn fuelled in many
cases by record supply chain delays. The speed of the recent
upsurge in demand has led to a sellers' market as capacity and
transportation constraints limit the availability of inputs to
factories.
A key indicator of capacity constraints is the survey's
suppliers' delivery times index. Sub-50 readings of this index mean
it is taking longer for suppliers to provide goods to factories, on
average. This tends to result in higher prices, as manufacturers
are willing to pay more to ensure sufficient supplies of key
inputs. The supplier delivery times index readings for May and June
were the lowest ever recorded by the survey, signalling an
unprecedented degree of supply delays.
A second indicator of constraints is the survey's backlogs of
work index. This index measures the amount of work (or orders) that
firms have received but either not yet completed or not even
started working on. This index has also been running at all-time
highs in May and June, signalling an unprecedented accumulation of
outstanding work.
A third indicator of concern is the amount of finished goods
inventory held in warehouses. These inventories fell in June at the
steepest rate since August 2009, as high sales to customers
depleted warehouses across the eurozone.
Investment indicators hint at lower price
pressures
There are encouraging signs, however, suggesting that companies
are expanding capacity to boost supply and meet rising demand,
which should alleviate some of the upward price pressures.
First, employment rose in June at the fastest rate recorded
since the survey began in 1998 as firms hired more workers to meet
demand. This workforce expansion should help reduce growth of
backlogs of work in coming months.
In particular, record employment growth was reported by firms
that specialise in supplying inputs to other companies
(intermediate goods producers), which in turn fuelled a near record
rise in production of these goods.
Second, the surge in hiring is being accompanied by an
unprecedented spell of investment in machinery and equipment.
Producers of these investment goods reported that new orders have
been rising at a survey record pace in recent months, and continued
to rise sharply in June, hinting that capex spending is growing
sharply as firms expand production capacity.
This expansion has been facilitated by improved optimism about
the year ahead, with future output expectations running at the
highest yet recorded by the survey in recent months.
The expansion of capacity via increased employment and greater
capital expenditure on business equipment and machinery should
hopefully raise output levels in sectors that are currently
straining to meet demand, and hence remove some of the upward
pressure on prices for these goods. This will inevitably take some
time, but in the absence of these developments the inflation
outlook would be considerably darker.
Transitory factors?
Two other factors arguably add to the story that the current
inflation spike will prove transitory are drawn from the anecdotal
evidence from the survey.
First, the reasons given for longer delivery times are commonly
associated with short-term issues due to the immediate surge in
demand as economies have opened up while logistics capacity remains
constrained. Widespread issues such as port congestion and a lack
of shipping containers should soon fade as the initial rebound from
the pandemic passes.
Second, the survey responses revealed a high degree of safety
stock building as companies sought to safeguard against potential
future supply disruptions. This is corroborated by recent PMI
survey data showing that the amount of inputs purchased by
manufacturers are growing faster than existing production
requirements to an extent not previously recorded by the survey
with the exception of last April (when mainland China reopened its
factories). This safety stock build is likely to be a particularly
short-lived phenomenon, as once sufficient precautionary
inventories have been established, demand will return to normal,
acting a relief valve on supply chains and prices.
Monitoring inflation trends
We have therefore established three key indicators of capacity
constraints to monitor:
suppliers' delivery times,
backlogs of work,
inventories of finished goods.
We have also highlighted two key series to watch in relation to
how quickly companies may be building additional capacity to cope
with rising demand:
employment,
orders for investment goods.
Finally, we have identified two transitory factors to watch
relating to the recent imbalance of supply and demand:
transportation delays,
the extent to which firms are building safety stocks.
All will need to be monitored closely in coming months to
understand the degree to which the current price spike may
persist.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.