The NAM/IndustryWeek Manufacturing Index -- Q1 2007
Although the business outlook for manufacturers is still looking good, optimism is starting to fade.
By David Huether, Chief Economist, National Association of Manufacturers
Roughly three quarters of both large (78%) and small (77%) manufacturing companies who responded to a survey conducted by the National Association of Manufacturers (NAM) had a positive business outlook for their firm right now. While this level of confidence is much higher than the 2001-2003 time frame (the recession/initial slow recovery period), it is a lower level of confidence compared to the past few years (2004-2006). In fact, the last time survey respondents were less optimistic was back in 2003.
220 NAM members responded to the survey. Large (those employing over 1,000 workers) and small companies answer 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 percent 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 steam, that confidence levels increased. In recent quarters, confidence levels have eased, signaling that the manufacturing recovery is cooling off.
Business Outlook
(Percentage of firms With a positive business outlook)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
| Large |
78% |
66% |
88% |
78% |
| Small |
81% |
64% |
85% |
77% |
Sales Expectations. Looking ahead 12-months, both large and small manufacturers expect their sales to continue to grow, but at a more modest pace than in recent years. Large firms expect their sales to increase by 4% over the next year, while smaller firms expect their sales to increase by a slightly higher 4.3%. By comparison, in the first quarter of 2006, both large and small respondents anticipated their sales to increase by 5.1% over the coming 12 months.
Compared to the average annual responses over the past few years (see chart below), it is quite clear that both large and small firms expect their sales growth to moderate in 2007. While a slowdown is anticipated, it does not appear to be nearly as drastic as the 2001 recession or the period of sluggish growth in 2002 and 2003.
Pricing Expectations. Looking ahead 12-months, both large and small manufacturers expect their pricing power to slip a bit. Large firms expect their sales to rise by 1.1%, while small firms expect the prices of their products will increase by a slightly stronger 1.6%. By comparison, in the first quarter of 2006, both large and small respondents anticipated their prices to rise by more than 2% over the coming year.
More modest pricing power is likely a consequence of slowing demand. However, it should be noted that pricing power expectations continue to be stronger than they were during the 1998-2003 period. During that time, large firms’ expectation of pricing power going out 12 months averaged just 0.4% during these six years. For small respondents, pricing power expectations averaged 0.9%.
Part of the reason why manufactures continue to expect to have greater pricing power now compared to the 1998-2003 period has to do with the value of the dollar. Due to the falling dollar, import prices are no longer deflationary, as such there is less downward pressure on prices than there was 19998-2002 period when the dollar rose in value again most other currencies.
Compared to the average annual responses over the past few years (see chart below), it is quite clear that both large and small firms expect their sales growth to moderate in 2007. While a slowdown is anticipated, it does not appear to be nearly as drastic as the 2001 recession or the period of sluggish growth in 2002 and 2003.
Investment Expectations. Looking ahead 12-months, both large and small manufacturers expect their capital expenditures to rise by 2.3% over the next 12 months (see chart below). For large firms, this is a deceleration from the average 2.9% increase expected last year, as well as the expectations in 2004 and 2005. For small firms, this is a modest acceleration from the 2.1% increase expected last year, jut slower than the expectations back in 2004 and 2005.
Answers to the first quarter survey suggests that while investment spending by manufacturers will continue in 2007, it will be at a slower pace that in the past few years.
Inventory Expecations. Both large and small survey respondents expect to reduce inventory levels over the next 12 months. Small companies expect to reduce inventories spending by 0.5% over the coming year. This is the largest negative expectation in two years (Q1 2005). At the same time, big companies expect to reduce inventories by 1.3% over the coming year, this is similar to decreases expected during the prior two years.
Census data shows that there was a buildup in inventories in the second half of last year in manufacturing. The responses to the first quarter survey seem to indicate that manufacturers will be working inventories off in coming months.
Employment. Both large and small respondents to the first quarter survey expect to increase employment over the next 12 months. Large firms expect employment to increase by a modest 0.5% while smaller firms expect their employment levels to increase by a stronger 1.3%. This is the continuation of a modestly positive long term trend. Since the 2nd quarter of 2005, both large and small survey respondents have had positive employment expectations. This has been matched by Labor Department data, which shows that excluding the motor vehicle sector as well as those sectors closely associated with housing, manufacturers have been modestly expanding their workforce over the past year. The first quarter report suggests that this trend will continue.
Wages. Both large and small survey respondents expect wages to increase by 2% over the coming 12 months. This is slower than the pace over the few years: Between 2003 and 2006, wages growth expectations averaged 2.5% for large and 2.3% for small manufacturers.
This is a positive signal that wage growth, while positive, remains contained, indicating that there should not be significant inflationary pressure from the manufacturing sector in 2007. IW
All charts developed by the National Association of Manufacturers (NAM).
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