The Impact of Shortages on Manufacturers' New Order Dynamics

Abstract

Industry practitioners and policymakers have a strong interest in understanding the dynamics associated with manufacturing firms' new orders. In the United States, many organizations, including the Institute for Supply Management (ISM), multiple branches of the Federal Reserve Banking System, and the Census Bureau publish data on new orders to inform practitioners and policymakers. This research explores how the occurrence of supply shocks moderates the impact that manufacturing firms' new orders have on manufacturing production, recruitment of workers, and suppliers' lead times. We extend the theory regarding firms' responses to supply shocks to explain why increases in new orders will have a less pronounced effect on production and employment, but a greater impact on supplier lead times during periods of pronounced shortage. To test our theory, we assemble a unique archival dataset that melds the Report on Business—Manufacturing (PMI) data from the ISM with the Census Bureau's Quarterly Survey of Plant Capacity Utilization to obtain measures of shortages. We test our hypotheses using time series techniques. We find results consistent with our predictions, which have important implications for theory, practice, and public policy.