The NAM/IndustryWeek Manufacturing Index -- 2nd Quarter 2008
Confidence in the Economy Continues to Erode for Large Manufacturers
By David Huether, Chief Economist, National Association of Manufacturers
Confidence among large manufacturers eroded (for a fourth consecutive quarter) in the second quarter of 2008. This marks the lowest confidence level in the history of the survey going back to the fourth quarter of 1997, with sales and employment expectations also falling to their lowest levels on record. For small manufacturers, the business outlook moderated in the second quarter, but it remained significantly elevated compared to large survey respondents.
Results of the second quarter survey are based on responses of 314 NAM member companies. Large (those employing more than 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. In addition, companies were asked about the prospects for a recession in 2008 and the impacts of higher import prices on their company.
Recession Expectations. Asked if the U.S. economy would go through a recession in 2008, slightly more than one-third (37%) answered 'yes.' This is less than the 50 percent of survey respondents who expected a 2008 recession in the first quarter survey. Twenty -five percent answered 'no,' and 38 percent answered 'maybe.'
What respondents are saying:
- "If we are not in one we must be very close."
- "We are and have been in recession since October 2007."
- "Energy prices will take a huge toll on the economy."
- "Depends on oil prices and whether Congress allows more drilling."
- "I think the recession in the U.S. industrial sector will begin in 2009 due to energy costs squeezing demand."
- "Not a recession in technical terms, but some industries, like auto, way down, and export-related up."
- "Two positive quarters already in the books; a recession would mean Q3 & Q4 would be negative; I doubt it."
- "Cannot find skilled workers, training is too slow, have to turn down work."
- "Very afraid of tax increases damaging the U.S. economy."
Impact of Rising Import Prices From Falling Dollar and Rising Transportation Costs. Due to a realigning dollar and rising transportation costs, prices of non-petroleum imports have accelerated in recent months. Asked how these forces have affected their company, survey respondents reported that the largest effect was higher costs:
- 79% of survey respondents reported that inflationary pressures from overseas have spilled over into the domestic economy in the form of "increased costs of materials and supplies purchased domestically."
- 59% of survey respondents reported "increased costs of materials and supplies imported from abroad."
- 30% of survey respondents reported "more purchases are being sourced domestically."
- 22% of survey respondents reported "eased import competition" as well as "increased pricing power."
What Respondents are Saying:
- "We have to do something about the high fuel cost. Drill here at home."
- "Increased the export potential for our products, thereby giving us some protection from the downturn in our domestic economy."
- "Increased our exports of products."
- "We are now exporting 20 percent of annual sales to South America, Canada & the Middle East."
- "Exporting is more favorable however difficult to find containers to ship product."
- "Increased the cost of capital equipment that is imported."
- "Raw material and energy costs will squeeze or eliminate margins over the next 12 months."
The Business Outlook. Sixty-seven percent of small and just 38% of large manufacturing companies who responded to the second quarter survey had a positive business outlook for their company.
For small respondents, the 3% drop in optimism from the 70% of survey respondents in the first quarter of 2008 to 67% in the second quarter marked the fourth decline in the past six quarters. The level of optimism in the second quarter was 21% below the level two years prior and the lowest level since the second quarter of 2003.
After tumbling 23 percentage points over the previous three quarters, the share of large companies who were optimistic about their business outlook dropped another 19 percentage points in the second quarter (the largest quarterly drop in five years). The level of optimism in the second quarter of 2008 was 58% below the level two years prior and the lowest level (38%) in the history of the survey.
While the level of optimism for small survey respondents remained higher in the second quarter of 2008 compared to 2001 (see graph below), large companies' optimism is slightly below the 2001 level.
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%. 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 four quarters, the business outlook worsened at a quicker pace, especially for large companies. This has coincided with a slowdown in manufacturing production. During the 12 months ending in May 2008, manufacturing production (outside of high tech) fell by 1.8%, and during the three months ending in May, production fell at an annual rate of 4%.
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) |
2008
(qtr 2) |
| Large |
78% |
66% |
88% |
78% |
80% |
63% |
59% |
57% |
38% |
| Small |
81% |
64% |
85% |
77% |
79% |
76% |
80% |
70% |
67% |
Sales Expectations. Looking ahead 12 months, small manufacturers expect their sales to continue to increase, but at a slower rate than earlier in the expansion, while large manufacturers expect their sales to decline.
Small firms expect their sales to increase by 2.5%, which is moderately slower than the pace of the prior three quarters but roughly double the expectation of 1.2% growth recorded in the third quarter of 2001.
Large firms expect their sales to decline by 0.7% over the next 12 months. This is a continuation of a decelerating path that started in the third quarter of last year and is the lowest sales expectation in the history of the survey. Prior to the second quarter survey, the lowest sales expectation for large companies was in the second quarter of 2001, when firms expected sales to decline by 0.1% over the upcoming 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) |
2008
(qtr 2) |
| Large |
4.8 |
2.7 |
4.9 |
4.0 |
4.5 |
2.8 |
2.1 |
0.9 |
-0.7 |
| Small |
4.0 |
2.4 |
4.6 |
4.3 |
3.9 |
3.1 |
3.0 |
3.0 |
2.5 |
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 3.2%, and small firms expect their pricing power to rise a similar 3.3% over the next 12 months. For both large and small companies, this is the most pricing power in the history of the survey.
Since 2004, manufacturing pricing power has accelerated compared to the 1998-2003 period, when pricing power for both large and small manufacturers was typically less than 1%.
Continued pricing power is likely a consequence of the falling value of the dollar, which has put upward pressure on import prices, surging energy prices and related transportation costs.
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) |
2008
(qtr 2) |
| Large |
0.5 |
0.3 |
1.7 |
1.1 |
2.0 |
1.5 |
1.7 |
2.3 |
3.2 |
| Small |
1.1 |
0.7 |
2.1 |
1.6 |
1.9 |
1.8 |
2.0 |
2.6 |
3.3 |
Investment Expectations. Looking ahead 12 months, large manufacturers expect their capital expenditures to decline by 1.5%. This marks the second consecutive expectation of negative investment growth going forward and is the slowest pace since the third quarter of 2001, when large firms expected capital investment to decline by 2.4% during the upcoming 12 months.
Small survey respondents expect their capital investment to increase by a moderate 1.5% over the next 12 months. This is slightly slower than the 1.8% average expectation during the prior three quarters and 40% slower than the average expectation of 2.5% growth during the 2004-2006 period.
These trends are consistent with a slowdown in overall business investment spending that has taken place over the past year and a half. The second quarter survey suggests that investment spending by manufacturers will remain subdued for the remainder of 2008.
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) |
2008
(qtr 2) |
| Large |
1.5 |
0.9 |
3.1 |
2.3 |
2.3 |
0.3 |
1.9 |
-0.1 |
-1.5 |
| Small |
2.4 |
0.8 |
2.5 |
2.3 |
2.2 |
1.6 |
1.7 |
2.1 |
1.5 |
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 3.3% (the biggest drop since the second quarter of 1999), while small companies expect to reduce inventories by a more moderate 0.5% over the coming year (slightly milder than the past few quarters).
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 is that the nationwide inventory-to-sales ratio for overall manufacturing approached a five-year high in March of 2008. Since March, inventories-to-sales ratios have begun to decline. However, a continuing effort to bring inventory levels back down to their 2004-2006 levels is prompting firms to reduce inventory investment going forward.
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) |
2008
(qtr 2) |
| Large |
-1.5 |
-1.8 |
-1.0 |
-1.3 |
-1.7 |
-1.9 |
-2.2 |
-2.2 |
-3.3 |
| Small |
0.2 |
-0.8 |
0.1 |
-0.5 |
-0.6 |
-0.6 |
-0.4 |
-0.7 |
-0.5 |
Employment Expectations. Small respondents to the second quarter survey expect to increase employment by 0.9% over the next 12 months. This is the same increase anticipated in the first quarter but slower than during the prior four quarters. Still, the last time employment expectations were worse among small survey respondents was during the first quarter 2003.
Meanwhile, large firms expect employment to decline by a large 3.3% (the largest decline in the history of the survey). This follows a -0.1 percent decline in the fourth quarter of 2007 and a -0.6% decline in the first quarter. The last time there were three consecutive quarterly declines in employment expectations by large firms was in 2003.
For small respondents, the second 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 due to spillover effects into manufacturing from the downturn in housing, slower business investment and decline in consumer purchases, particularly durable goods.
For large firms, expectations of actual declines in employment are consistent with the fact that large companies responding to the survey in the second quarter are less optimistic and have lower sales and investment expectations.
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) |
2008
(qtr 2) |
| Large |
0.8 |
-0.5 |
0.7 |
0.5 |
0.3 |
0.4 |
-0.1 |
-0.6 |
-3.0 |
| Small |
2.1 |
0.8 |
1.8 |
1.3 |
1.7 |
1.6 |
1.2 |
0.9 |
0.9 |
Wage Expectations. Large survey respondents expect wages to increase by 1.1% over the coming 12 months. This is a significant slowdown from the pace earlier in the expansion and coincides with a significant drop in employment expectations. For smaller companies, wages are expected to grow 2.3%, which is slightly faster than the pace over the past year.
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) |
2008
(qtr 2) |
| Large |
3.1 |
2.2 |
2.5 |
2.0 |
1.9 |
1.9 |
1.6 |
2.0 |
1.1 |
| Small |
2.9 |
2.0 |
2.2 |
2.0 |
2.3 |
2.2 |
2.1 |
2.1 |
2.3 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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