Manufacturers struggling to keep up with demand face a difficult question: As the Covid-19 crisis recedes, how persistent is that demand going to be?
The Institute for Supply Management on Tuesday said that its index of manufacturing activity rose to 61.2 last month from April’s already high 60.7. Anything over 50 indicates manufacturing expansion.
The reading is a reflection of the unusually strong demand for goods that the pandemic set off. Unable to spend their money on services like travel and restaurant meals, and in many cases laden with extra cash as a result of government relief payments, Americans have been buying things instead. But with Covid-19 cases falling and the share of vaccinated Americans continuing to rise, it is difficult to say just how long the party will last.
On the one hand, as the economy reopens it seems likely consumers will direct more of their money toward services, and that shift could be outsize as people make up for lost time. Families might extend their vacations, for example, or make what used to be one restaurant meal a week into two. And a lot of demand for goods might have been pulled forward—the big-screen television bought to while away the pandemic isn’t going to be bought again.
But despite that possibility, demand for goods in many cases is still overwhelming supply, while the global computer-chip shortage and other supply-chain bottlenecks have made it even harder for manufacturers to produce enough. An index of manufacturers’ order backlogs within Tuesday’s report reached its highest level since the ISM began reporting it in 1993. And the ISM’s index on supplier deliveries, which goes higher when delivery times are slower, hit its highest level since 1974.
Moreover, just because people might ramp up their spending on services doesn’t necessarily mean their penchant for buying goods is going to go away. Many Americans have substantially increased their savings over the past year, providing them with the wherewithal to step up their overall spending, while the continuing recovery in the labor market could further add to demand. The pandemic-related boom in housing could also play a role, since there are rooms and garages that need filling.
Indeed, a recent analysis of
Bank of America
credit and debit card data conducted by the bank’s economists found that spending on durable goods (long-lasting items such as cars and couches) has remained as elevated in Florida as in California, even though Florida’s earlier reopening led sooner to a pickup in services spending.
Of course at some point demand for goods will be sated, and if history is any guide it could be pretty sudden—there are plenty of instances where the ISM’s manufacturing index has gone from lofty levels to below 50 in short order. In the back of their minds manufacturers know that as soon as they feel like they’re on top of orders, orders could slow, tilting the supply-demand imbalance in another direction.
But what is front of mind for now is figuring out how to keep up.
Write to Justin Lahart at email@example.com
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