Demand and prices are falling for manufactured goods

We learned this week that manufacturing activity in December dropped to its lowest level since the early days of the pandemic.

According to the Institute for Supply Management — which surveys manufacturers about their output, delivery lead times, input prices, and other factors — the big factor holding the sector back is demand.

This time last year, demand for manufactured goods was high. Tim Quinlan, senior economist at Wells Fargo, says the industry had to scramble to keep up.

“The biggest difficulty that firms had, say, a year ago at this time, was finding the raw materials and resources they needed,” Quinlan said. “And finding the headcount to staff the factory floor.”

All of that meant manufacturers had a big backlog of orders to work through. But more recently, Quinlan says that backlog has been shrinking.

“That’s occurred without a coinciding increase in shipments,” he said. “And so that sort of implies that some of these orders have just been canceled.”

Demand for manufactured goods has been falling in recent months in the U.S. and overseas, says Scott Paul, president of the Alliance for American Manufacturing.

“We have interest rates that are hitting businesses in the United States, and consumers in the United States,” Paul said. “You had the COVID lockdowns in China, you have a lot of economies dealing with inflation.”

Meanwhile, manufacturers are still dealing with a tight labor market, according to Chad Moutray, chief economist with the National Association of Manufacturers.

“Wage growth continues to be very elevated,” Moutray said. “And manufacturers continue to tell me just how difficult it is to attract and retain workers.”

But falling demand for manufactured goods has helped to make supply chains less congested. Input prices have also been falling.

“That also is an encouraging sign that some of those bigger problems that manufacturers have had to face over the last couple years … have started to pull back a little bit, at least in terms of their severity,” Moutray said.

That relief means the prices manufacturers charge for their goods is falling, too. Quinlan says that’s welcome news.

“I think we could all stomach a little bit of slower demand in the economy if that’s the elixir that brings some of these price pressures down,” he said.

Quinlan says the Federal Reserve has been raising interest rates to throw some sand in the gears of the economy. In the manufacturing sector, it appears to be working.