The NAM/IndustryWeek Manufacturing Index -- 3rd Quarter 2009
The business outlook for manufacturers improved in the third quarter of 2009, marking the second consecutive quarterly improvement.
When the economy entered recession in the fourth quarter of 2007, 70% of respondents to the NAM/IndustryWeek Manufacturing Index had a positive business outlook. This level of optimism bottomed out at 28% in the first quarter of this year. After increasing to a level of 42% in the second quarter, the share of survey respondents with a positive business outlook increased again to 55% in the third quarter, the highest level in six quarters.
While the recent improvement in manufacturers' business outlook is positive news, results of the third quarter survey suggest that manufacturers expect business conditions to improve gradually over the next year, based on third quarter results on the outlook of sales, pricing power, investment, inventories, employment and wage growth, all of which improved for a second consecutive quarter in the third quarter of 2009.
Still, nearly identical to the second quarter survey roughly two-thirds (65%) of survey respondents do not expect an upturn in their company's production until sometime in 2010.
By David Huether, Chief Economist, National Association of Manufacturers
Results of the third quarter survey are based on responses of 403 members of the National Association of Manufacturers (NAM). Companies recorded their business outlook as well as their 12-month expectation on sales, prices, capital investment, inventories, employment and wages. In addition, companies were asked: From your company's perspective, how long will a downturn in production last?
From your company's perspective, how long will a downturn in production last?
A clear majority (65%) of respondents to the third quarter survey expect a downturn in their company's production will last into 2010. This is nearly identical to the 66% who answered similarly in the second quarter.
The remaining 35% of survey respondents were spit as follows: 7% (4th Quarter 2009), 16% (production has already started to rebound), 8% (experiencing a slowdown, but not a downturn) and 5% (production has remained healthy).
The Business Outlook. After rising from a record-low 28% of manufacturing companies responding that had a positive business outlook in the first quarter to 42% in the second quarter, conditions further improved in the third quarter. A slight majority (55%) had a positive business outlook for their company in the third quarter (see chart 2 below).
While the improvement in the third quarter is a welcomed sign, a fuller review of the results signal that manufacturers' optimism remains tentative.
As the table below shows, most (91%) of the movement in the business outlook from the first quarter to the third quarter has been from "Very," or "Somewhat Negative" to "Somewhat Positive." The share of respondents that was "Very Positive" only edged up from 3% in the first quarter to 5% in the third quarter.
Business Outlook Detail
| |
Very
Positive |
Somewhat
Positive |
Somewhat
Negative |
Very
Negative |
| 2009 Q1 |
3% |
25% |
43% |
29% |
| 2009 Q1 |
4% |
39% |
41% |
17% |
| 2009 Q3 |
5% |
49% |
35% |
10% |
The confidence level (the share of survey respondents with a positive business outlook) of manufacturers has gone through six cycles since the survey began in late 1997.
In the tail end of the 1990s expansion, the percent of survey respondents with a positive outlook averaged around 80%.
During the 2001 recession, confidence fell to 58.8%.
During the 2002-2003 period, a slow initial recovery held confidence down at 70.6%.
It was not until the 2004-2005, when the manufacturing recovery picked up significant momentum, that confidence increased to an average level of 87.6%.
After peaking at 91% in the fourth quarter of 2005, confidence began to moderate in 2006 and 2007, as the housing market began to falter and energy prices began to rise.
Since the current recession began at the end of 2007, manufacturers' business outlook eroded significantly through the first quarter of 2009, but began to turn more positive in the second and third quarters.
Business Outlook
(Percentage of firms with a positive business outlook)
| 1998-2000 |
2001 |
2002-2003 |
2004-2005 |
2006-2007 |
2008 (q1) |
2008 (q2) |
2008 (q3) |
2008 (q4) |
2009 (q1) |
2009 (q2) |
2009 (q3) |
| 79% |
53% |
71% |
88% |
79% |
64% |
52% |
41% |
33% |
28% |
42% |
55% |
Sales Expectations. Looking ahead 12 months, respondents to the third quarter 2009 survey expect their sales to increase by 1.6%, the first positive expectation in a year. The anticipation in sales over next year supports the expectation of a majority of survey respondents that an upturn in production will take place in 2010. At the same time, the modest nature of the projected upturn is in line with composition of the improvement in the business outlook: mostly somewhat positive and very little very positive.
The anticipation of a 1.6% increase in sales going forward is milder than the expectation of a 2.1% rise in sales recorded in this survey back in the fourth quarter of 2001 when the last recession was ending (See chart 3). In the subsequent four quarters (Q4 2001 to Q4 2002), the Commerce Department reported that manufacturing shipments increased by a similar 2.4% during this time, very similar to the expectations recorded in the fourth quarter 2001 NAM/IndustryWeek Manufacturing Index.
Sales Outlook
(12-Month Percent Change Expectation)
| 1998-2000 |
2001 |
2002-2003 |
2004-2005 |
2006-2007 |
2008 (q1) |
2008 (q2) |
2008 (q3) |
2008 (q4) |
2009 (q1) |
2009 (q2) |
2009 (q3) |
| 4.2 |
1.8 |
3.0 |
4.7 |
4.0 |
2.7 |
2.3 |
1.2 |
-3.1 |
-5.2 |
-0.6 |
1.6 |
Pricing Expectations. Looking ahead 12 months, respondents to the third quarter 2009 survey expect their prices (the prices of their overall product line) to increase 0.4%, the first positive expectation in pricing power in a year, after two consecutive quarters of expected deflation (fourth quarter 2008 and first quarter 2009) and no change in the second quarter. This slight increase in pricing power is consistent with a modest upturn in inflation at the producer level over the past few months and may be a sign that demand is expected to turn around positive over the next year.
After remaining relatively stable in the 2004-2007 time period, price expectations surged to a record high of 3.3% in the second quarter of last year before reversing significantly in the subsequent three quarters. This large gyration was likely caused by both the turmoil in the energy prices in 2008 as well as the sharp drop off in demand starting in the second half of last year. See Chart 4.
Even though inflationary expectations have edged back into positive territory, at 0.4%, they remain subdued. This expectation is very similar to the expectation of a 0.5% increase in pricing power in the NAM/IndustryWeek Index taken in the fourth quarter of 2001, when the last recession was ending. In the subsequent four quarters (Q4 2001 to Q4 2002), the Labor Department's measure of inflation in the manufacturing sector showed a modest increase of 1.9%. Therefore, the inflation rate in the manufacturing sector over the next year will likely be low.
Price Outlook
(12-Month Percent Change Expectation)
| 1998-2000 |
2001 |
2002-2003 |
2004-2005 |
2006-2007 |
2008 (q1) |
2008 (q2) |
2008 (q3) |
2008 (q4) |
2009 (q1) |
2009 (q2) |
2009 (q3) |
| 1.0 |
0.6 |
0.7 |
2.0 |
2.0 |
2.6 |
3.3 |
2.2 |
-0.2 |
-0.9 |
0.0 |
0.4 |
Investment Expectations. Looking ahead 12 months, manufacturers expect their capital investment expenditures to edge up 0.2%, according to results of the third quarter 2009 survey. This marks the first positive expectation in a year. See chart 5.
The current expectation of a slight uptick in capital spending by manufacturers over the coming four quarters is nearly identical to the 0.1% expectation at the end of the last recession back in the fourth quarter of 2001. In the subsequent four quarters (fourth quarter 2001 to fourth quarter 2002) actual business investment declined by 6%.
It is important to recall that while manufacturing is more capital intensive than two thirds of the private sector economy, capital spending by manufacturers accounted for about 15% of total business capital expenditures in 2007. While the actual pace of overall business investment differs historically from the responses to the NAM/IndustryWeek Manufacturing Index, this survey does have an accurate track record with respect to turning points as well as the acceleration and deceleration of overall business investment spending in the U.S. economy over the past twelve years.
Therefore, the result of the current survey is a good sign that capital investment spending by business should start to improve over the coming year.
Investment Outlook
(12-Month Percent Change Expectation)
| 1998-2000 |
2001 |
2002-2003 |
2004-2005 |
2006-2007 |
2008 (q1) |
2008 (q2) |
2008 (q3) |
2008 (q4) |
2009 (q1) |
2009 (q2) |
2009 (q3) |
| 2.3 |
0.4 |
1.1 |
2.7 |
2.1 |
1.8 |
1.3 |
0.3 |
-2.2 |
-4.1 |
-2.0 |
0.2 |
Inventory Expecations. Respondents expect to continue to reduce inventory levels over the coming year, but at a milder pace than the prior three quarters. After deep declines expected during the prior three quarters (where inventories were expected to decrease on average by 3.7%), respondents to the third quarter survey expect inventories to decrease by 1.5% over the next year. This is consistent with government reports that while excess inventories at the retail and wholesale levels have largely been worked off, manufacturers continue to have excess stocks.
The good news is that with downstream inventory levels down to more manageable levels and domestic demand starting to show signs of life, manufacturers should expect to reduce inventories at a more moderate pace over the coming year, which is consistent with the third quarter results.
Inventory Outlook
(12-Month Percent Change Expectation)
| 1998-2000 |
2001 |
2002-2003 |
2004-2005 |
2006-2007 |
2008 (q1) |
2008 (q2) |
2008 (q3) |
2008 (q4) |
2009 (q1) |
2009 (q2) |
2009 (q3) |
| -0.1 |
-1.3 |
-0.6 |
0.0 |
-0.5 |
-0.9 |
-0.7 |
-1.4 |
-3.5 |
-4.8 |
-2.9 |
-1.5 |
Employment Expectations. Along with modest expected increases in sales and capital investment over the coming year, respondents to the third quarter survey expect employment to edge up by 0.1% over the next 12 months. See Chart 7.
The expectation of employment to remain essentially unchanged over the coming year is consistent with a labor market that has improved in recent quarters. After declining by 606,000 in the first quarter of the year, employment decrease moderated by 73% to 158,000 in the third quarter of this year.
The expectation of employment to edge up slightly over the next 12 months will likely occur with employment declines moderating over the coming quarters and then turning up in the second half of next year.
Employment Outlook
(12-Month Percent Change Expectation)
| 1998-2000 |
2001 |
2002-2003 |
2004-2005 |
2006-2007 |
2008 (q1) |
2008 (q2) |
2008 (q3) |
2008 (q4) |
2009 (q1) |
2009 (q2) |
2009 (q3) |
| 1.8 |
0.3 |
0.9 |
1.5 |
1.4 |
0.7 |
0.6 |
0.1 |
-2.5 |
-3.6 |
-0.8 |
0.1 |
Wage Expectations. After four years of steady growth (2003-2007), survey respondents drastically cut back expectations of wage growth starting in the third quarter of 2008. By the first quarter of 2009, survey respondents expected wage growth (which excludes benefits) to edge down 0.3% over the coming 12 months. After rebounding modestly in the second quarter with an expectation of wages growing by 0.4% over the coming year, respondents to the third quarter expect wages to increase by 0.8% over the coming year.
Historically, overall private sector wage growth has grown 0.7 percentage points faster than responses to the NAM/IndustryWeek Manufacturing Index. Assuming that this relationship holds going forward, private sector wages should increase by a modest 1.5% over the next 12 months.
Wage Outlook
(12-Month Percent Change Expectation)
| 1998-2000 |
2001 |
2002-2003 |
2004-2005 |
2006-2007 |
2008 (q1) |
2008 (q2) |
2008 (q3) |
2008 (q4) |
2009 (q1) |
2009 (q2) |
2009 (q3) |
| 2.9 |
2.3 |
1.9 |
2.2 |
2.2 |
2.1 |
2.2 |
1.8 |
0.6 |
-0.3 |
0.4 |
0.8 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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