NAM/IndustryWeek Q1 Survey: Manufacturers Predict Higher Sales, Investment and Employment

Much has been made of the recent resurgence in manufacturing activity. After much slower growth in the middle of 2011, production started to pick up again around October or November. This coincides with manufacturers and the public becoming cautiously more confident in the economy overall, despite a number of persistent headwinds.

This also was evident in thelast NAM/IndustryWeek Survey of Manufacturers released in December. The percentage of manufacturers who were either somewhat or very positive about their business outlook jumped to 80%, up from 65% in the September survey. Americans had become anxious with developments in Europe, the downgrading of the U.S. credit rating, persistent challenges in the labor and housing markets, and tax and regulatory uncertainties. Indeed, the September figure which had plummeted 20 points in just three months mirrored many other sentiment surveys at the time. As confidence started building, business activity increased, new employees were added and consumers began spending again.

The outlook for growth this year improved with the revival in optimism at the end of last year. I am currently predicting 2.6% growth in real GDP in 2012, which is in line with other estimates. Even with slower growth in the middle of last year, industrial production is up 3.4% in the last year and 9.3% in the last two years. In addition, manufacturers have added 111,000 net new jobs in the past three months, or 425,000 since December 2009. Sentiment surveys suggest higher activity in the coming months as well.

This quarter's NAM/IndustryWeek Survey of Manufacturers reflects this optimism. As shown in Figure 1, 88.7% of NAM members responding to this survey had a positive outlook up from 80.2% in December and 65.4% in September. The bulk of these responses (68.3%) said that they were "somewhat positive," up from 55.6% last time. This perhaps suggests a level of guardedness not reflected in the top-line figure -- that manufacturers are cautiously optimistic overall. With that said, the percentage of those saying that they were "somewhat negative" fell from 17.2% to 10.5% since December. Given these responses, we are able to predict, using regression analysis, that industrial production in the manufacturing sector (NAICS) should be 95.5 in the third quarter of 2012. This suggests that industrial production would be 3.9% higher in the third quarter of 2012 than in the same time period in 2011. The model was constructed so that current NAM/IndustryWeek outlook data, along with other variables, can predict industrial production levels six months from now. As Figure 2 shows, it does so with a fairly solid track record, explaining 86% of the variation over the past 14 years. As noted, it suggests continued growth in production over the next two quarters.

This more positive assessment carries forward into manufacturers' forecasts for sales, employment and capital spending plans for the next 12 months (Figure 3). Almost 77% of respondents expect their sales to increase in the next year, with the average expected increase being 5.3%. This is up from the 4.4% increase seen in December, and it reflects the fact that 53.6% of the responses suggested sales gains of more than 5%. On the other end of the spectrum, 15.9% anticipate no change in sales, and 23.0% expect for their sales to fall. Other measures of manufacturing activity picked up, as well. Overall hiring and capital spending were predicted to grow by 2.2% and 4.1%, respectively. Those figures had been 1.8% and 2.8% in the previous survey. As such, there was a modest uptick in employment expectations; businesses' investment plans rose more dramatically. In terms of capital spending intentions, 49.1% plan to increase their investment, while 38.4% anticipate no changes.

Manufacturing wages are expected to rise by 1.8% over the next 12 months, with 56.4% of respondents suggesting increases of less than 3%. After relatively flat growth in the December surveys, inventories are expected to rise by 1.9% over the next 12 months. Prices for final goods are anticipated to go up by 2.2% in the next year, which is only marginally higher than the 2.0% stated last time. For the most part, while businesses have been pressured by rising raw material and energy costs in the past year, their ability to pass along these costs has been hampered, with overall core inflation modest. International trade continues to represent a tremendous opportunity for manufacturers. Over 41% expect to export more products next year, with 14.5% calculating increases of more than 5%. Both of these figures are slightly below their levels from the December survey, possibly due to weaknesses in the global economy, particularly in Europe. As a sign of how important trade is for manufacturing growth, of those companies anticipating higher exports, one-quarter were very positive about their business outlook. While this is lower than the one-third in the last survey, it is still higher than the 17.8% expecting fewer or no change in exports. Manufacturers continue to push for greater access to new markets, the easing of export controls and the reauthorization of the Export-Import Bank. Size continues to be an important determinant of how firms respond to the survey. Medium and larger firms (e.g., those with 50 or more employees) were more positive than their smaller counterparts. For example, 14.1% of small manufacturers were "somewhat negative" in their outlook; this compares to 10.3% and 6.3%, respectively, for medium and large manufacturers. Smaller entities were also less optimistic in their sales forecasts, anticipating 3.9% growth on average over the next 12 months instead of the 5.0% or higher anticipated by larger ones.

In looking at the current challenges facing manufacturers, what is most notable is that fewer respondents cited the weak economy as their primary concern (Figure 4). It dropped from first place to fourth. The top concerns among manufacturers now are an unfavorable business climate and rising energy and raw material costs, with each cited by 60% or more of those taking the survey. (Respondents could pick more than one challenge.) In addition, many of those who volunteered an answer included comments about the tax and regulatory environment and oil and gas prices. A sampling of some of these comments appears at the end. Other major impediments were higher insurance costs, attracting and retaining a quality workforce, and increased international competition. On the latter item, a number of individuals mentioned rising domestic competition as a new challenge. On the talent issue, one respondent added, "No talent available. We are all going after the same people." This sentiment was expressed by others, as well, with some discussing how difficult it was to hire qualified applicants. The skills gap is definitely a challenge, and it is being discussed more and more. President Obama, for instance, has endorsed the Manufacturing Institute's skills certification system, and manufacturers support the America Works Act, which would create a skills credential registry and make workforce training a greater national priority. While the U.S. economy has become less of a concern than in previous surveys, a growing domestic economy was cited by nearly 73% of manufacturers as a primary driver of their future growth (Figure 5). However, several individuals noted slowing global economies and uncertainties in Europe as obstacles that might hinder their growth plans. New product development, increased efficiencies and greater exports were also cited as essential strategies for success.

The NAM/IndustryWeek Survey of Manufacturers has been conducted quarterly since 1997. This survey was conducted among NAM membership between February 15 and 29, 2012, with 479 manufacturers responding. Responses were from all parts of the country, in a wide variety of manufacturing sectors and in varying size classifications. Aggregated survey responses appear on the following pages. The next survey is expected to be released in June 2012. NAM/IndustryWeek Q1 Survey: Selected comments on the biggest challenges facing manufacturing right now:

"Demand by our customer base to reduce selling price due to international competition." (primary metals or fabricated metal products)
"No talent available. We are all going after the same people." (machinery)
"Threat of war with Iran; European debt crisis; general uncertainty throughout the world with regard to political issues." (computer and electronic products)
"EPA, EPA, EPA." (chemicals)
"Lack of clarity regarding future federal tax policy, regulation and health care mandates." (miscellaneous manufacturing)
"Health insurance costs and mandates (up 100% in the last two years)." (food manufacturing)
"Can't go over 50 employees because then medical insurance will be unaffordable. We are at 49 employees now." (primary metals or fabricated metal products)
"Reducing training costs by drawing from a trained pool of people. Currently we have hired 140 people since 2009 and another 25 people will be added in 2012. We will interview 150 to get 25. Most do not have the basic foundation to enter the manufacturing workforce nor can they pass a drug screen." (primary metals or fabricated metal products)
"European economic crisis and its possible domino effect." (electrical equipment and appliances)
"General inflation in cost of virtually all overhead items." (wood products)
"Cuts in Defense Dept. budgets." (apparel and allied products)
"Health insurance costs are a huge issue for profitability." (transportation equipment)

Survey Responses 1. How would you characterize the business outlook for your firm right now? a. Very positive 20.3% b. Somewhat positive 68.3% c. Somewhat negative 10.5% d. Very negative 0.8% 2. Over the next year, what do you expect to happen with your company's sales? a. Increase more than 10% 20.9% b. Increase 5 to 10% 32.6% c. Increase up to 5% 23.4% d. Stay about the same 15.9% e. Decrease up to 5% 3.8% f. Decrease 5 to 10% 1.5% g. Decrease more than 10% 1.9% Average expected increase in sales consistent with these responses = 5.3% 3. Over the next year, what do you expect to happen with prices on your company's overall product line? a. Increase more than 10% 1.5% b. Increase 5 to 10% 13.4% c. Increase up to 5% 43.9% d. Stay about the same 37.8% e. Decrease up to 5% 2.9% f. Decrease 5 to 10% 0.4% g. Decrease more than 10% no responses Average expected increase in prices consistent with these responses = 2.2% 4. Over the next year, what are your company's capital investment plans? a. Increase more than 10% 19.7% b. Increase 5 to 10% 14.5% c. Increase up to 5% 14.9% d. Stay about the same 38.4% e. Decrease up to 5% 4.4% f. Decrease 5 to 10% 2.7% g. Decrease more than 10% 5.5% Average expected increase in investment consistent with these responses = 4.1% 5. Over the next year, what are your plans for inventories? a. Increase more than 10% 4.4% b. Increase 5 to 10% 8.6% c. Increase up to 5% 16.1% d. Stay about the same 51.8% e. Decrease up to 5% 11.5% f. Decrease 5 to 10% 4.2% g. Decrease more than 10% 3.4% Average expected increase in inventories consistent with these responses = 1.85% 6. Over the next year, what do you expect in terms of full-time employment in your company? a. Increase more than 10% 3.0% b. Increase 5 to 10% 15.2% c. Increase up to 5% 30.7% d. Stay about the same 45.7% e. Decrease up to 5% 4.2% f. Decrease 5 to 10% 0.8% g. Decrease more than 10% 0.4% Average expected increase in full-time employment consistent with these responses = 2.2% 7. Over the next year, what do you expect to happen to employee wages (excluding non-wage compensation such as benefits) in your company? a. Increase more than 5% 1.3% b. Increase 3 to 5% 23.7% c. Increase up to 3% 56.4% d. Stay about the same 18.4% e. Decrease up to 3% no responses f. Decrease 3 to 5% 0.2% g. Decrease more than 5% no responses Average expected increase in wages consistent with these responses = 1.9% 8. Over the next year, what do you expect to happen with the level of exports from your company? a. Increase more than 5% 14.5% b. Increase 3 to 5% 13.9% c. Increase up to 3% 12.6% d. Stay about the same 55.3% e. Decrease up to 3% 2.1% f. Decrease 3 to 5% 0.4% g. Decrease more than 5% 1.1% Average expected increase in exports consistent with these responses = 1.6% 9. What are the primary drivers of your company's future growth strategies? (Respondents were able to check only one response; therefore, responses will exceed 100%.) a. Increased efficiencies in the production process 46.5% b. Increased international sales 41.0% c. New product development 48.8% d. Recent mergers or acquisitions 9.7% e. Stronger domestic economy, sales of our products 72.9% f. Other 6.5% 10. What are the biggest challenges you are facing right now? (Respondents were able to check only one response.) a. Attracting and retaining a quality workforce 39.1% b. Challenges with access to capital or other forms of financing 8.2% c. Increased international competition 23.7% d. Rising energy and raw material costs for our products 60.0% e. Rising insurance costs 42.5% f. Unfavorable business climate (e.g., taxes, regulation, etc.) 62.2% g. Weaker domestic economy, sales of our products 41.9% h. Other 7.2% 11. What is your company's primary industrial classification? a. Apparel and allied products 0.2% b. Beverages and tobacco products no responses c. Chemicals 5.7% d. Computer and electronic products 4.0% e. Electrical equipment and appliances 5.6% f. Food manufacturing 1.9% g. Furniture and related products 1.5% h. Leather and allied products 0.2% i. Machinery 11.7% j. Miscellaneous manufacturing 16.6% k. Nonmetallic mineral products 2.5% l. Paper and paper products 1.5% m. Petroleum and coal products 0.8% n. Plastics and rubber products 7.8% o. Primary metals, or fabricated metal products 34.4% p. Printing and related activities 1.5% q. Textile mills or textile products 1.3% r. Transportation equipment 3.4% s. Wood products 3.4% 12. What is the size of your firm (e.g., the parent company, not your establishment)? a. Less than 50 employees 26.7% b. 50 to 499 employees 53.0% c. 500 or more employees 20.3%