Factory Activity Slips as Broker Market Thrives

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The U.S. manufacturing economy lost steam in March, falling to its lowest level since September 2020 on weakness in new orders and production. Supplies remain tight as tech manufacturers rely “more and more” on the broker market, according to the Institute for Supply Management’s latest PMI report.

During supply constraints electronics companies often move beyond their approved vendor lists (AVL) to source components. OEMs typically buy directly from suppliers and authorized distributors. Brokers are part of a non-authorized or gray market which is the primary source of counterfeit components in the electronics supply chain.

Source: Institute for Supply Management

The March PMI declined by 1.5 percent from the February reading of 58.6 percent. As any reading above 50.0 indicates expansion, U.S. manufacturing activity remains robust. However, the prices sub-index increased by 11.5 percent to 87.1 percent in March. New orders slipped 7.9 percent to 53.8 and production 4 percent to 54.5 – a bit of a surprise, according to Tim Fiore, chair of the ISM’s manufacturing survey committee.

“Manufacturer inventories didn’t change much from February levels,” he said, “which indicates they’ve had trouble converting that to production. There are no signals that demand has ebbed, so I think March [new orders] represents a blip.”

Reliance on the broker market has increased in electronics although statistics are difficult to come by. Industry sources say incidents of component failures have steadily increased during the past year. Companies do not want to draw attention to sourcing anomalies in their supply chains, so incidents largely go unreported.

“We are seeing [failures] all over,” said one source. Even if a component is authentic, it might not be qualified to the tolerance or performance specs of an application. Brokers often re-mark components to fetch a higher price.

Sticker shock

Manufacturing employment grew in 3.4 percent in March which should support higher production levels in factories. “Hiring has become easier,” Fiore said. Panelists reported lower rates of quits and early retirements compared to previous months, as well as improving internal and supplier labor positions.

But production remains constrained. Supplier deliveries and imports both slid in March. Russia’s invasion of Ukraine has increased energy prices and had added to global supply chain uncertainty. “There’s a lot of emotion around price hikes in commodities,” said Fiore. “Energy costs have gone up; steel has gone up and Russia is a source of aluminum and other materials. When suppliers see something coming, they aren’t waiting to see what happens – they go to their customers and say, ‘we can’t bear this cost increase – we need help.’” In four to six months, he added, palladium and neon may impact manufacturing – both are largely sourced from Russia and Ukraine.

Commodities up in price include electrical and electronic components for 16 months and semiconductors for 14, the ISM reports. Commodities listed in short supply include aluminum (5 months); cable assemblies and electrical components (18 months);  power supplies and printed circuit board assemblies (3 months); programmable logic (2 months); and semiconductors for 18 months.

China’s Covid-related lockdown contributed to a nearly 4 percent decline in U.S. export orders. China’s factory activity slumped at the fastest pace in two years in March, so China isn’t placing orders for U.S. goods.

“No letup yet in supply chain challenges, especially electronic components. Relying more and more on the broker market,” a computer manufacturer told the ISM. “Demand continues to be strong. Backlog is still increasing — currently at about three months of production,” said a manufacturer in electrical equipment. “Availability of purchased material continues to constrain production, causing the increased backlog.”

Still, ISM panel sentiment remained strongly optimistic regarding demand, with six positive growth comments for every cautious comment, down from February’s ratio of 12-to-1, said Fiore.

“Manufacturing performed well for the 22nd straight month, with demand registering slower month-over-month growth [likely due to extended lead times] and consumption softening slightly [due to labor force improvement]. Omicron impacts are being felt by overseas partners, and the impact to the manufacturing community is a potential headwind,” he concluded.