The NAM/IndustryWeek Manufacturing Index -- 1st Quarter 2008
Half of All U.S. Manufacturers Expect a Recession in 2008
By David Huether, Chief Economist, National Association of Manufacturers
Confidence among large manufacturers eroded (for a third consecutive quarter) in the first quarter of 2008 to the lowest level in five years, with sales expectations falling to their lowest level since the second quarter of 2001. For small manufacturers, the business outlook moderated as well in the first quarter of the year, but remained elevated compared to large survey respondents.
Asked if the U.S. economy would go through a recession in 2008, half (50%) of the survey respondents answered 'yes,' 17% answered 'no' and 33% answered 'maybe.'
Asked how their current business environment compares to the 2000-2001 period, nearly two thirds (61%) of survey respondents answered that current conditions for their company are 'better than 2000-2001,' 17% responded that current conditions are 'similar to 2000-2001' and 22% responded that current conditions are 'worse than 2000-2001.'
Asked about their reliance on foreign markets for their company's sales, more than three quarters (77%) responded that they export. A key finding of the first quarter survey is that more export-oriented companies are more optimistic. More export-oriented companies also had a better outlook with respect to sales, capital investment, and employment.
57% of large and 70% of small manufacturing companies who responded to a survey conducted by the National Association of Manufacturers (NAM) had a positive business outlook for their firm in the first quarter of 2008. For small respondents, the 10% drop in confidence from the 80% of survey respondents who had a positive outlook in the fourth quarter of 2007 marked the biggest quarterly drop since the 11% decline in first quarter of 2001. Having declined five of the past eight quarters, the level of optimism in the first quarter of 2008 was at the lowest level since the second quarter of 2003.
After tumbling 17 percentage points in the third quarter of last year, and dropping another 4 percentage points in the fourth quarter, the percent of large manufacturers with a positive business outlook eroded another 2 percentage points to 57% in the first quarter of 2008, the lowest level since the first quarter of 2003.
Despite the moderating business outlook that had taken place over the past two years, the level of optimism for both large and small survey respondents remained higher in the first quarter of 2008 compared to the first quarter of 2001. This is consistent with survey responses indicating that most companies' business environment is better than it was back in 2000-2001.
202 NAM member companies responded to the survey. Large (those employing over 1,000 workers) and small companies recorded their business outlook as well as their 12-month expectation on sales, prices, capital investment, inventories, employment and wages.
The confidence level of manufacturers has gone through three periods since the survey began in late 1997. In the tail end of the 1990s expansion, the percentage of survey respondents with a positive outlook averaged around 80%. Then, during the 2001-2003 period (the recession and slow initial recovery) confidence fell significantly. It was not until the 2004-2006 period of time, when the manufacturing recovery picked up significant momentum, that confidence levels increased.
From the second quarter of 2006 to the second quarter of 2007, the business outlook for both large and small manufacturers moderated at a gradual pace. Over the most recent three quarters, the business outlook worsened at a quicker pace. This has coincided with a slowdown in manufacturing production. During the 12 months ending in February 2008, manufacturing production rose 2.1%, and excluding high-tech manufacturing, production rose just 0.5%.
Business Outlook
(Percentage of firms With a positive business outlook)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(qtr 1) |
2007
(qtr 2) |
2007
(qtr 3) |
2007
(qtr 4) |
2008
(qtr 1) |
| Large |
78% |
66% |
88% |
78% |
80% |
63% |
59% |
57% |
| Small |
81% |
64% |
85% |
77% |
79% |
76% |
80% |
70% |
Recession Expectations
Asked if they expected the U.S. economy to go through a recession in 2008:
Half (50%) of survey respondents answered 'yes.'
What respondents are saying:
"Expect housing and credit markets to continue down. Also expect consumer spending to be affected and maybe other global economies as we are the still the largest global economy."
"We're in one now..."
"Without question the housing industry is in a recession presently at least as significant as that in the early 1980s."
"The financial engineering debacle will affect every industry before it is digested."
"I believe we're currently in a recession. Uncertainty related to subprime/liquidity/credit issues and the outcome of the U.S. Presidential election will continue to weigh on the economy until year end."
Less than a fifth (17%) answered 'no.'
What respondents are saying:
"The US economy will see mixed performance. Some sectors, such as exports and process related industries, will be strong. In contrast, those focused on consumer spending will be weak and may see a down turn. I worry that we will talk ourselves into a recession."
"Very minimal growth first two quarters, but not recession, unless the media really talks us into one."
"Unless there is some big-bad event (9/11)."
A third (33%) responded 'maybe.'
What respondents are saying:
"The overall economy will; certain sectors will be able to prosper."
"Businesses with exports will do well in this economy."
"We have not seen any signs of recession yet."
2000-2001 vs. 2008
The last time the U.S. economy went through a recession was in 2001. That downturn, which started for manufacturers in 2000, hit the manufacturing sector especially hard. Asked to compare their company's current business environment to the 2000-2001 period:
Nearly two-thirds (61%) of survey respondents answered that today's environment is 'better than 2000-2001.'
What respondents are saying:
"We are agricultural based and often counter cyclical to national economy. Ag economy is stronger than at any time in the past decade."
"Strong international growth has reduced dependency upon US economy -- we are a net exporter."
"We were slammed hard in 2001-2002. We are setting sales and profit records now."
"Then we were experiencing declining sales; today it's just slow growth or no growth with higher input costs."
"We witnessed a significant downturn in the business in 2000-2001; we're not seeing that right now, although we have become more bearish recently."
"Our business is increasing daily."
Almost a fifth (17%) described current conditions as 'similar to 2000-2001.' Less than a quarter (22%) characterized their current business environment as 'worse than 2000-2001.'
What respondents are saying:
"Orders falling off but our costs keep going up! Energy goes up, everything goes up!"
"Worse in that margins are really being squeezed."
"Congress in the last year has hurt business, with no relief in the future."
"Fuel costs are killing the economy."
Exports
More than three quarters (77%) of survey respondents reported that they export products to foreign markets. Cross tab analysis shows that more export-oriented firms have a more positive business outlook.
For firms that expect at least 25% of their company's sales growth this year to come from exports, 81% reported a positive business outlook.
For firms that expect up to 25% of their company's sales growth this year to come from exports, 67% reported a positive business outlook.
For firms that do not export, just 60% reported a positive business outlook.
Results from the first quarter survey also show that more export-oriented companies have more positive outlook with respect to sales, capital investment and employment.
For firms that expect at least 25% of their company's sales growth this year to come from exports:
66% expect sales to increase over the next 12 months.
55% expect to increase capital investment over the next 12 months.
90% expect to maintain or expand employment levels over the next 12 months.
For firms that do not expect to export in 2008:
47% expect sales to increase over the next 12 months.
45% expect to increase capital investment over the next 12 months.
76% expect to maintain or expand employment levels over the next 12 months.
Sales Expectations. Looking ahead 12-months, both large and small manufacturers expect their sales to continue to increase, but at slower rates than earlier in the expansion. Small firms expect their sales to increase by 3%, which is the same pace as the prior two quarters but slower than the expectation during the first half of last year as well as during the 2004-2006 period, when small respondents expected their sales to increase by 4.6%, on average, over the coming 12 months.
Sales Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(qtr 1) |
2007
(qtr 2) |
2007
(qtr 3) |
2007
(qtr 4) |
2008
(qtr 1) |
| Large |
4.8 |
2.7 |
4.9 |
4.0 |
4.5 |
2.8 |
2.1 |
0.9 |
| Small |
4.0 |
2.4 |
4.6 |
4.3 |
3.9 |
3.1 |
3.0 |
3.0 |
Large firms expect their sales to increase by just 0.9% over the next 12 months. This is less than half of the pace of the fourth quarter, and the slowest sales expectation since the second quarter of 2001.
Pricing Expectations. Both large and small manufacturers expect their pricing power to increase over the coming 12 months. Large firms expect their prices to rise by 2.3% in 2008, while small firms expect their pricing power to rise a similar 2.6%. For large companies, this is the most pricing power since the fourth quarter of 2005. For small companies, this is the most pricing power in the history of the survey, which started in the fourth quarter of 1997.
Price Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(qtr 1) |
2007
(qtr 2) |
2007
(qtr 3) |
2007
(qtr 4) |
2008
(qtr 1) |
| Large |
0.5 |
0.3 |
1.7 |
1.1 |
2.0 |
1.5 |
1.7 |
2.3 |
| Small |
1.1 |
0.7 |
2.1 |
1.6 |
1.9 |
1.8 |
2.0 |
2.6 |
Since 2004, manufacturing pricing power has accelerated compared to the 1998-2003 period, when pricing power for both large and small manufacturers was typically under one%.
Continued pricing power is likely a consequence of the falling value of the dollar. Since the dollar peaked in February 2002, it has fallen in value by 25%. As the dollar has retreated, import prices have become inflationary, and there is less downward pressure on prices than there was 1998-2002 period, when the dollar was on the rise.
Investment Expectations. Looking ahead 12-months, large manufacturers expect their capital expenditures to remain essentially unchanged, falling by 0.1%. This is the slowest pace since the fourth quarter of 2001. Meanwhile, small companies expect their investment spending to grow by a stronger 2.1%. While this is the fastest pace in three quarters, it is still slightly slower than the pace during the 2004-2006 period.
Investment Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(qtr 1) |
2007
(qtr 2) |
2007
(qtr 3) |
2007
(qtr 4) |
2008
(qtr 1) |
| Large |
1.5 |
0.9 |
3.1 |
2.3 |
2.3 |
0.3 |
1.9 |
-0.1 |
| Small |
2.4 |
0.8 |
2.5 |
2.3 |
2.2 |
1.6 |
1.7 |
2.1 |
These trends are consistent with a slowdown in overall business investment spending that has taken place over the past year and a half. The first quarter survey suggests that investment spending by manufacturers will growth at a subdued pace in 2008.
Inventory Expecations. Both large and small survey respondents expect to reduce inventory levels over the next 12 months. Large firms expect to reduce inventories by 2.2% over the next 12 months (the same as the 2007 fourth quarter survey) while small companies expect to reduce inventories spending by a more moderate 0.7% over the coming year (slightly faster than the fourth quarter survey).
Inventory Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(qtr 1) |
2007
(qtr 2) |
2007
(qtr 3) |
2007
(qtr 4) |
2008
(qtr 1) |
| Large |
-1.5 |
-1.8 |
-1.0 |
-1.3 |
-1.7 |
-1.9 |
-2.2 |
-2.2 |
| Small |
0.2 |
-0.8 |
0.1 |
-0.5 |
-0.6 |
-0.6 |
-0.4 |
-0.7 |
The continued desire to reduce inventories is likely being driven by two forces. One is the fact that demand going forward is expected to be less than earlier in the expansion, especially for large survey respondents. The other force the fact that nationwide, the inventory-to-sales ratio for overall manufacturing reached a four-year high in February 2008. Therefore, a continuing effort to bring inventory levels back down to their 2004-2006 levels is prompting firms to reduce inventory investment.
Employment Expectations. Small respondents to the first quarter survey expect to increase employment by 0.9% over the next 12 months. This is a slower increase than was anticipated during the prior four quarters, and the single slowest quarterly expectation of employment growth in five years (first quarter 2003).
Employment Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(qtr 1) |
2007
(qtr 2) |
2007
(qtr 3) |
2007
(qtr 4) |
2008
(qtr 1) |
| Large |
0.8 |
-0.5 |
0.7 |
0.5 |
0.3 |
0.4 |
-0.1 |
-0.6 |
| Small |
2.1 |
0.8 |
1.8 |
1.3 |
1.7 |
1.6 |
1.2 |
0.9 |
Meanwhile, large firms expect employment to decline by 0.6%. This follows a -0.1% expectation in the fourth quarter of 2007. The last time there were two consecutive quarterly declines in employment expectations by large firms was in the second and third quarters of 2005.
For small respondents, the first quarter responses were slightly downgraded from expectations expressed in the in the second half of 2007, and half of the pace compared to the 2004-2006 period. This parallels Labor Department data on manufacturing production employment, which rose from 2004 through the middle of 2006 but has declined since then mainly due to spillover effects into manufacturing from the downturn in housing.
For large firms, expectations of actual declines in employment are consistent with the fact that large companies responding to the survey in the first quarter are less optimistic and have slower sales expectations.
Wage Expectations. Large survey respondents expect wages to increase by 2.0% over the coming 12 months. This is the fastest pace in the year, but slightly slower than the average pace expected during the 20404-2006 time frame. At the same time, small companies anticipate wages to increase by a similar 2.1% over the coming year. This is comparable to the average pace over the past three years.
Wage Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(qtr 1) |
2007
(qtr 2) |
2007
(qtr 3) |
2007
(qtr 4) |
2008
(qtr 1) |
| Large |
3.1 |
2.2 |
2.5 |
2.0 |
1.9 |
1.9 |
1.6 |
2.0 |
| Small |
2.9 |
2.0 |
2.2 |
2.0 |
2.3 |
2.2 |
2.1 |
2.1 |
The survey results signal that wage growth, while positive, remains contained and continues to indicate that there should not be significant inflationary pressure on the wage front from the manufacturing sector in 2008.
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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