Strong manufacturing numbers are masking a stockpiling scramble

S&P Global released new manufacturing sector data on Thursday that showed April output rose at its fastest rate in four years. That was fueled by the biggest jump in new orders since May of 2022.

All this would appear to be good news for U.S. manufacturing. But when you drill down into the survey data, “You start to see that the picture's not quite so rosy,” said Chris Williamson, chief business economist and an executive director at S&P Global Market Intelligence.

For instance, all those new orders aren’t because manufacturers are seeing skyrocketing demand for their products. “This is due to people building safety stocks, because they're fearing supply shortages or price hikes in the coming months,” Williamson said.

Manufacturers, meanwhile, don’t know what’s coming through the Strait of Hormuz or when, so they’re trying to get everything they need to fill those orders on hand now.

In other words, “we’re moving into sort of a bunker mentality in manufacturing,” said Zac Rogers, who researches operations and logistics at Colorado State University. He said it’s not unlike last year, when U.S. firms stocked up on imports ahead of tariffs.

“The difference now is instead of, ‘Oh, let's build up the finished goods.’ We are, in addition to that, seeing, ‘Let's also build up the components that we need for manufacturing that we might not have access to if this war continues on through the summer,’” Rogers said.

Buying in bulk can also reduce how much manufacturers spend on fuel, he added — the price of which is way up. But it tends to be the larger manufacturers that have enough cash to do this.

“The really smaller firms may not be able to afford to do those really big forward buys,” said Rogers. “And so if this ends up being really expensive, this is going to disproportionately hurt the smaller businesses in the economy.”

There is, of course, risk in hoarding months' worth of materials, per Jason Miller, a professor of supply chain management at Michigan State University.

“If you do a lot of forward buying, your ability to match supply and demand is now reduced,” he said.

Like if rising inflation or a sinking job market causes consumers to buy less of the stuff you make, “lord forbid, but let's say that the worst-case scenario comes to pass, you're now sitting on a lot of excess input inventory and your demand is falling,” Miller said.

And that means those manufacturers could end up with a bunch of unsold goods later this year.