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Manufacturers grow faster in August, ISM finds, despite delta and labor shortages

The numbers: The coronavirus delta variant has added fresh stress on the U.S. economy, but companies face an even bigger hurdle in finding the supplies and workers they need to keep pumping out goods.

A closely followed index of U.S.-based manufacturing rose to 59.9% in August from 59.5% in the prior month, the Institute for Supply Management said Wednesday.

Economists polled by MarketWatch had forecast a reading of 58.6%. Any number above 50% signifies growth.

Big picture: Businesses have plenty of demand, even with delta variant spreading across he country. The biggest problem are broad shortages of supplies tied to the unprecedented Covid disruptions in the global economy and an explosion in pentup demand after the U.S. mostly reopened this year.

“Part shortages are our largest business constraint,” said an executive at a electrical manufacturer.

Read: Consumer confidence sinks to 6-month low on delta anxiety and high inflation

Hiring enough workers to produce the goods and services has also become a major headache.

Millions of people who had jobs before the pandemic still haven’t returned to work — and delta could make them wait even longer. Some companies have even had to cut back because they don’t have enough workers.

“Labor is still an issue,” said an executive a maker of plastic and rubber products. Other executives also reported the same problem. 

The supply and labor shortages eventually should ease and return to pre-Covid patterns, though the delta variant could push out the timetable.

“I think we will continue to deal with it, but it’s going to add more stress,” said Timothy Fiore, chairman of the survey. “We are probably going to be living with these variants with quite some time.”

In the meantime businesses and consumers can expect to pay higher prices spawned by the shortages. Inflation in the U.S. is running at the highest level in 30 years, based on the Federal Reserve’s preferred price barometer.

Key details: New orders and production both increased in August and were at 60% or above. That’s the good news.

The bad news is, the backlog of orders grew again and remained near an all-time high. Companies can’t produce enough goods to sell them as quickly as the orders come in, reflecting the ongoing bottlenecks.

A gauge of employment also turned negative again. Fiore said it’s a struggle to find workers and delta has caused an increase in absenteeism, making it harder for companies to keep production lines fully staffed.

The ISM index is compiled from a survey of executives who order raw materials and other supplies for their companies. The gauge tends to rise or fall in tandem with the health of the economy.

What they are saying: “Demand in the U.S. factory sector remains strong,” said senior economist Michael Pearce of Capital Economics, but “supply constraints, and particularly labor shortages, are still proving to be a drag.”

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.18%

and S&P 500
SPX,
+0.11%

were little changed in Wednesday trades.

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