Manufacturer’s Close Out Challenging 2020 on High Note

After facing unprecedented and extraordinarily volatile conditions in 2020, the Gardner Business Index (GBI) ended the year on a high note adding almost 2-points in December to close at 53.5.  All six of the components which constitute the Index moved higher in absolute terms during the month.  This meant quickening expansion for production and new orders activity which were already registering expansionary (above ‘50’) readings in November.  For backlog and employment activity, the higher readings resulted in transitions from mildly contracting activity levels (represented by readings slightly below ‘50’) to slightly expanding activity as both crossed above the ‘50’ mark.  Lastly, December’s higher yet still below ‘50’ reading for import orders activity represented a slowing contraction in foreign orders activity.

One key change observed in the December data was the sharp increase in the reading for supplier deliveries.  Dissimilar to other components of the Index, higher supplier delivery readings indicate lengthening order-to-delivery times.  The all-time high reading was likely caused by the overwhelming demand on logistics networks at year end as holiday e-commerce sales and vaccine distribution efforts fought for limited space on planes and trucks alongside the materials needed for manufacturers to maintain operations.  Removing the inflationary impact of the supplier deliveries reading on the GBI, the Index would have registered a less impressive 50.8 reading.

Slowing supplier delivery speeds can impact other business activities and may have influenced December’s production and backlog readings.  Delivery delays in input materials and products can constrict production targets, limiting production activity.  Subsequently, backlog levels increase when production cannot keep up with new order demand.  The interplay among these measures has been quite apparent in 2020 and will likely continue to be so well into 2021.

Another challenge manufacturers will face early in 2021 will be the growing spread between production costs and product prices.  December’s 20-point spread between the index reading for material prices and prices received set a historic record.  These data indicate that a large proportion of manufacturers are experiencing some level of increasing materials costs while a much smaller proportion are willing and able to push through price increases.  The widening spread has significant ramifications on operational profitability.

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