The NAM/IndustryWeek Manufacturing Index -- 2nd Quarter 2009
After Five Consecutive Quarterly Declines, the Business Outlook for Manufacturers Improved in the Second Quarter of 2009, With 42% Having a Positive Business Outlook.
This is up from the record low 28% that had a positive business outlook in the first quarter of the year. While manufacturers are more optimistic than they were during the prior three quarters, it is still noteworthy that less than half of survey respondents had a positive business outlook for a fourth consecutive quarter. The second quarter results of the NAM/IndustryWeek Manufacturing Index are consistent with a manufacturing sector still in recession.
On the positive side, it appears that conditions should improve over the next 12 months, based on second quarter results on the outlook of sales, pricing power, investment, inventories, employment and wage growth, all of which improved in the second quarter of 2009. Still, two-thirds of survey respondents do not expect an upturn in manufacturing production until sometime in 2010.
By David Huether, Chief Economist, National Association of Manufacturers
Results of the second quarter survey are based on responses of 368 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 (66%) of respondents to the second quarter survey expect a downturn in their company's production will last into 2010. This is slightly higher than the 60% who answered similarly in the first quarter. The remaining 34% of survey respondents were spit: 17% expect a downturn in production will end sometime in the second half of this year and 17% are not currently experiencing a downturn in production (experiencing a slowdown, a rebound, or growth has remained healthy).
The Business Outlook. After a record low 28% of manufacturing companies responding that they had a positive business outlook in the first quarter, second quarter results were more positive: 42% had a positive business outlook for their company. This upturn follows five consecutive quarterly declines in the series, which began in the fourth quarter of 1997. While the second quarter results are in improvement from the first quarter, a majority (58%) remain bearish, signaling that a near-term surge in manufacturing production is not likely.
As the table below shows, most of the movement in the business outlook detail has been from "Very Negative" in the first quarter to "Somewhat Positive" in the second quarter. The share of respondents that were either "Very Positive" or "Somewhat Negative" remained essentially unchanged.
Business Outlook Detail
| |
Very
Positive |
Somewhat
Positive |
Somewhat
Negative |
Very
Negative |
| First Quarter 2009 |
3% |
25% |
43% |
29% |
| Second Quarter 2009 |
4% |
39% |
41% |
17% |
| Change |
1% |
14% |
-2% |
-12% |
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, manufactures' business outlook eroded significantly through the first quarter of 2009, but began to turn more positive in the second quarter.
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) |
| 79% |
53% |
71% |
88% |
79% |
64% |
52% |
41% |
33% |
28% |
42% |
Sales Expectations. Looking ahead 12 months, respondents to the second quarter 2009 survey expect sales to decrease by 0.6%. Though still negative, this is significantly better than the results of the prior two quarters, when sales expectations for the coming 12 months averaged -3.1%.
Expectations of slower sales growth began in 2006 and gradually intensified in 2007 and through the first three quarters of 2008 before deteriorating significantly during the prior two quarters.
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) |
| 4.2 |
1.8 |
3.0 |
4.7 |
4.0 |
2.7 |
2.3 |
1.2 |
-3.1 |
-5.2 |
-0.6 |
Pricing Expectations. Looking ahead 12 months, respondents to the second quarter 2009 survey expect their prices (the prices of their overall product line) to remain unchanged. This follows two consecutive quarters of expected deflation and may signal pricing power is stabilizing due to an expected turnaround in demand over the coming 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 more recently.
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) |
| 1.0 |
0.6 |
0.7 |
2.0 |
2.0 |
2.6 |
3.3 |
2.2 |
-0.2 |
-0.9 |
0.0 |
Investment Expectations. Looking ahead 12 months, manufacturers expect their capital investment plans to decline by 2%, according to results of the second quarter 2009 survey. This marks the third consecutive expectation of negative investment growth going forward, though the prior two quarters were more negative.
Similar to sales expectations, the investment component of the survey had been on a decelerating path since the beginning of 2006. This trend intensified over the course of 2008 and turned negative in the fourth quarter.
This trend is consistent with a slowdown in overall business investment spending that has taken place in recent quarters. The second quarter survey suggests that investment spending by manufacturers will not likely turn positive until the second half of 2010 at the earliest.
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) |
| 2.3 |
0.4 |
1.1 |
2.7 |
2.1 |
1.8 |
1.3 |
0.3 |
-2.2 |
-4.1 |
-2.0 |
Inventory Expecations. Respondents expect to continue to reduce inventory levels significantly over the coming year. Manufacturers expect to reduce inventories by 2.9% over the next 12 months, while this is a deceleration from the prior two quarters, it is clear that manufacturers are still burdened with excess inventory levels, which is why even though manufacturers expect their sales to edge down 0.6% over the coming year, inventories are expected to decline by a faster 2.9%.
The need to reduce inventories is largely being driven by the fact that since the second quarter of last year, manufacturers have not been able to reduce inventories to match the sharp decline in shipments. As a result, the inventory to sales ratio in the manufacturing sector reached a 13-year high in the first quarter of 2009, though they have stabilized over the past few months. As manufacturers continue to work off excessive inventory stocks, this will also have a dampening effect on production going forward until the excess inventories are brought down to a reasonable level.
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) |
| -0.1 |
-1.3 |
-0.6 |
0.0 |
-0.5 |
-0.9 |
-0.7 |
-1.4 |
-3.5 |
-4.8 |
-2.9 |
Employment Expectations. Coincident with improvements in expected in sales and capital investment, respondents to the second quarter survey expect employment to fall by a milder 0.8% over the next 12 months. While still negative, this is a significant improvement from the expectation of the prior two quarters, when manufacturers expected employment to decline by more than 3% over the coming 12 months.
The moderation in the expectation of future declines in manufacturing employment mirrors the Labor Department's report on overall manufacturing employment, where employment declines have decreased over the past few months. Of the 1.9 million jobs lost since the beginning of the recession 18 months ago (December 2007), 53% (1,026,000) took place in the fourth quarter of 2008 and the first quarter of 2009.
The positive news is that the 0.8% employment decline expected over the next 12 months is much smaller than prior expectations, signaling that most of the recession-related manufacturing employment declines have already taken place.
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) |
| 1.8 |
0.3 |
0.9 |
1.5 |
1.4 |
0.7 |
0.6 |
0.1 |
-2.5 |
-3.6 |
-0.8 |
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. In the second quarter survey, survey respondents expect wages to rebound modestly, growing by a 0.4% over the coming year. While this is an improvement from the prior quarter, it remains very weak, and signals that consumer spending is not likely to rebound briskly in the near term.
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) |
| 2.9 |
2.3 |
1.9 |
2.2 |
2.2 |
2.1 |
2.2 |
1.8 |
0.6 |
-0.3 |
0.4 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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