Raw material shortages have abated, but some lingering issues remain

Amidst reporting that manufacturing firms are stockpiling intermediate inputs before potential tariffs and threats of a second East and Gulf Coast port strike, it’s important to emphasize that chronic shortages of raw materials/intermediate inputs that plagued U.S. manufacturers in 2021 and 2022 have declined substantially but remain above levels consistently observed from 2014-2019.

Raw material shortage issues differ across manufacturing industries, and continue to remain elevated for those industries most affected by increased demand for computing power and electricity from the AI computing and data center boom. In this article, I will summarize current levels of raw material shortages, highlight sectors still suffering from shortages well above pre-COVID levels, and offer some thoughts as to how I see shortage levels evolving in 2025.

Where things currently stand

Data from the Census Bureau’s Quarterly Survey of Plant Capacity Utilization (QSPC)shows that roughly 11% of manufacturing plants in the United States continue to cite shortages of raw materials as a key impediment affecting their capacity utilization. This is comparable to levels observed in 2018 when U.S. manufacturing showed strong growth in output. Importantly, while this figure is down from the ~40% readings observed in Q3 2021 through Q2 2022, it remains more than double the ~5% figures observed in 2014–2016. Consistent with the QSPC data showing that raw material shortage issues have found a stable level, separate data from the much smaller New York Fed’s Empire State Manufacturing Survey regarding current supply availability has reported neutral readings for much of 2024, suggesting that raw materials are neither becoming harder nor easier to obtain. Thus, the data supports a conclusion that while raw material shortages have abated, they have settled in at levels which, on aggregate, are higher than what was observed from 2014-2019.

 

 

Differences across sectors

The proportion of plants citing raw material shortages differs across manufacturing sectors. The table below compares the proportion of plants by industry that cited raw material shortages as a key impediment to capacity utilization in Q3 2024 (most recent data) relative to Q3 2021. Almost every sector for which data is reported—Q3 2024 data for paper (NAICS 322), beverage & tobacco (NAICS 312), and leather products (NAICS 316) couldn’t be reported due to data disclosure rules—has seen substantial reductions in raw material shortages; the lone exception is primary metals (NAICS 331), which was relatively unique in citing raw material shortages at a low rate in Q3 2021.

To highlight how some sectors have seen substantial improvement in raw material availability, consider two industries: transportation equipment (NAICS 336) and chemicals (NAICS 325). As shown in the two figures below, raw material shortages in these two industries, as of Q3 2024, have fully reverted to levels observed in 2014-2019. This is a far cry from readings of 40-50% that were frequently observed in 2021 and 2022. 

 

 

Where shortages remain prevalent

The table presented earlier indicates two sectors where raw material shortfalls continue to remain quite elevated: computer & electronic products (NAICS 334) and electrical equipment, appliances, and components (NAICS 335). The common theme uniting these two sectors is they are both experiencing strong demand due to the AI computing and data center boom that has spurred tremendous demand for computing equipment and electricity. This can be especially seen in the sharp increase in industrial production of electrical equipment (NAICS 3353) needed to generate and distribute electric power, where production in now 25% above 2017 levels, with the ratio of unfilled orders over shipments far above pre-COVID levels. Not surprisingly, strong demand creates challenges with obtaining necessary inputs.

 

 

 

What I will be watching for 2025

As I’ve written with Yemisi Bolumole, the primary reason raw material shortages began to sort themselves out beginning in earnest in Q3 2022 was the slowdown in demand triggered by the Federal Open Market Committee sharply raising the federal funds rate beginning in March 2022. As demand slowed, existing capacity could catch up with backlogged orders, reducing raw material shortages. This can be seen below in that the proportion of plants citing insufficient demand as a key factor affecting capacity utilization began rising in late 2022, just as raw material shortages began abating.

 

As we move into 2025, there are a few indicators I will be closely following. The first is capacity utilization across all manufacturing sectors; this series is strongly procyclical with manufacturing demand, and given insufficient orders are currently the primary constraint on capacity utilization, seeing an uptick in utilization will suggest that demand-side constraints are weakening. This, in turn, would be a harbinger of greater concerns that raw material shortages could impede capacity utilization. The second is the Institute for Supply Management’s subindex for new orders. This data represents a diffusion index capturing month-over-month momentum in new orders. Seasonally adjusted new orders have improved slightly into expansion territory the past few months, though December’s reading of 52.5 is still below levels that indicate future strong expansion in manufacturing (e.g., >55). An increase in new orders has historically served as a leading indicator that demand-side constraints on manufacturing capacity utilization are weakening. The third is ISM’s supplier delivery subindex, as longer delivery times are indicative of worsening raw material availability conditions. Consistent with this, the New York Fed’s Supply Availability Index correlates r = -0.95 with the ISM Supplier Lead Time Index from October 2021 (when the New York Fed began collecting these data) through December 2024. These indicators, in addition to the QSPC data and New York Fed data on Supply Availability, provide supply chain managers a holistic series of indicators regarding raw material shortages affecting U.S. manufacturing firms.

 

About the author

Jason Miller is the interim chairperson and Eli Broad Professor of Supply Chain Management in the Department of Supply Chain Management of the Eli Broad College of Business at Michigan State University.

SC
MR