U.S. Manufacturing Groans Under Cost Inflation: “The Outlook Remains Bleak Even a Year From Now”

[Financial News]  

The war in Iran, tariffs and the artificial intelligence (AI) boom are pushing U.S. manufacturers into cost inflation. Energy and import prices are rising, while the prices of key electronic components are soaring.
The Institute for Supply Management (ISM)'s August manufacturing prices index was found to have surged on the 15th (local time), when the yield on 10-year U.S. Treasury bonds climbed to its highest level in 19 years, since the 2007 subprime mortgage crisis that marked the starting point of the financial crisis.

According to the ISM manufacturing prices index, manufacturers' costs have risen for 23 consecutive months. Manufacturers said costs had increased across the board, from petroleum-based products to steel and aluminum.
They are spending more on raw materials, energy and logistics. Some costs recorded double-digit growth. As a result, companies have begun passing those costs on to consumer prices, adding to consumer inflation.
Financial Times (FT) reported that U.S. manufacturing is facing new supply-chain pressures and cost inflation due to high oil prices stemming from the war in Iran, higher import tariffs and electronic components being diverted to AI data centers.

Jack Rogers, a professor at Colorado State University, said, "Supply-chain inventories are shrinking, while costs are rising." He added, "It is becoming increasingly difficult to achieve the best return on investment across the supply chain."
According to the August producer price index (PPI) released by the U.S. Department of Labor's Bureau of Labor Statistics (BLS), prices for final manufactured goods rose 6.6%. By contrast, prices for intermediate materials and components—including diesel fuel, raw materials and electronic components—rose 11.5%, nearly twice as much. Prices for basic raw materials such as scrap metal and crude oil also surged 12.8%.
Fuel costs have risen sharply since the end of August. According to the American Automobile Association (AAA), the price of diesel at U.S. gas stations reached a record $6.27 per gallon on the 15th. Wholesale diesel prices also jumped that day, signaling that another increase in retail diesel prices is inevitable in the near future.
As oil prices soar, the cost of transporting goods is rising at a record pace. The average transportation cost last month was estimated to have jumped 16% from a year earlier.

For some companies, not only are costs soaring, but materials are also becoming harder to obtain.
Tracy Taffany, co-president of Minnesota metalworking company Wyoming Machine, said it was difficult to obtain raw materials. Steel, in particular, is "experiencing pronounced supply problems," Taffany said.
The current situation is different from the COVID-19 pandemic, when materials could not be obtained no matter how much more companies were willing to pay. Factories and logistics networks are operating normally, and goods are available in the market. However, sharply higher energy costs, raw-material prices, freight rates and tariffs have made purchasing goods an enormous burden.

The situation is different in the electronics industry.
The AI boom has made it difficult even to obtain components. Data centers are absorbing specialized parts ranging from memory chips to GPUs (graphics processing units) and CPUs (central processing units), and supply itself is falling short.
In the ISM's August survey, manufacturers said the electronic-component supply chain was experiencing a more serious and complex crisis than during the pandemic.
The shortage of components in the electronics industry is a global phenomenon.
In an August survey by the Global Electronics Association (GEA), two-thirds of electronics manufacturers worldwide said component availability was limited or that lead times—the time between placing an order and receiving the goods—had lengthened.
Despite the shortage of components, many companies are hesitant to expand their facilities because uncertainty is excessively high, ranging from the war in Iran to tariffs.
Rogers of Colorado State University warned, "No company will undertake large-scale capital spending without a certain degree of confidence." He added, "That is why market conditions a year from now will not be different from those today."

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