A jump in supplier delivery times was a key detail across the manufacturing PMI reports in Europe today
The German report especially underscored the issue this has on the headline PMI reading:
"Supplier delivery times in fact had a positive influence on the headline PMI at the margin in October, with reports of delays having increased for the first time in five months to the highest since July."
Again, for some context, the headline manufacturing PMI reading is derived as such:
The PMI is a weighted average of the following five indices: New Orders (30%), Output (25%), Employment (20%), Suppliers' Delivery Times (15%) and Stocks of Purchases (10%). For the PMI calculation the Suppliers' Delivery Times Index is inverted so that it moves in a comparable direction to the other indices.
Note the caveat highlighted in bold. As such, a surge higher in supplier delivery times (index moves lower) will serve to artificially bolster the overall PMI readings - something which was a problem when the pandemic first struck in Q1 last year here.
With supply chain disruptions likely to persist and potentially worsen in the months ahead, expect this to be more of a mainstay. As such, the more important components when viewing manufacturing PMI data are actually output and new orders.
Markit chief economist, Chris Williamson, made mention of this last year:
Longer delivery times are usually a good thing (firms are busier due to strong demand) so it acts in a positive direction to raise the PMI. However, current longer delivery delays are a symptom of supply shock. So still boosting PMI but means a false signal of health.
This is something to take note of when reviewing the manufacturing PMI data in the coming months, in order to get a better sense of supply issues and actual underlying health of factory conditions across the globe.
In today's reports, we can start to see a trend being formed. Here is the one for France:
However, firms were hit with an accelerated deterioration in vendor performance during October. Supplier delivery times lengthened to the second-sharpest extent in the series' history, surpassed only by that seen in April 2020 at the beginning of the pandemic. While stock levels at vendors were reportedly low, transport availability was also scarce.
And here is the one for Spain:
This slowdown was linked predominately to severe and unprecedented delays in the delivery of inputs to manufacturers. Firms widely reported that stocks at vendors were in increasingly scarce supply, and this was proving to be a growing constraint on production growth, especially at a time of rising order book volumes. Transportation and logistical challenges, especially with sea freight, were also widely mentioned.
And this is the one for Italy:
October data also highlighted a further lengthening of supplier delivery times, with delays among the most severe on record. Supply issues stemmed from material shortages and logistical issues, according to panellists.