The NAM/IndustryWeek Manufacturing Index -- Q2 2007
While confidence remains below the 2004-2006 period, the business outlook for both large and small manufacturers edged up in the second quarter of 2007 after declining during the prior four quarters.
By David Huether, Chief Economist, National Association of Manufacturers
80% of large and 79% 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 second quarter of 2007. While this level of confidence is lower than during the 2004-2006 time period (when the manufacturing recovery was accelerating from an initial sluggish upturn), it represents an improvement from the first quarter for both large and small respondents. In fact, this is the first time in a year and a half that the business outlook improved for both large and small manufacturers.
293 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 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 momentum, that confidence levels increased.
From the first quarter of 2006 to the first quarter of 2007, the business outlook for both large and small manufacturers dimmed. This coincided with coincident slowdowns in both manufacturing production and GDP growth. The upturn in manufacturers' business outlook in the second quarter of 2007 is an initial signal that the slowdown in economic activity that has taken place over the past year may be coming to an end.
Business Outlook
(Percentage of firms With a positive business outlook)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
| Large |
78% |
66% |
88% |
78% |
80% |
| Small |
81% |
64% |
85% |
77% |
79% |
Sales Expectations. Looking ahead 12 months, both large and small manufacturers expect their sales to continue to grow. Small firms expect their sales to increase by 3.9%. This is a slower pace than the 4.3% expectation in the first quarter as well as slower than the average expectations during the 2004-2006 period. Large firms expect their sales to increase by a more-robust 4.5% over the next 12 months. This is an improvement from the first quarter.
Compared to the average annual responses over the past few years, both large and small firms expect their sales growth to be more moderate in the short term. However, the uptick in the sales expectations by large firms is an encouraging sign that a rebound in the manufacturing sector is beginning to develop.
Sales Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
| Large |
4.8 |
2.7 |
4.9 |
4.0 |
4.5 |
| Small |
4.0 |
2.4 |
4.6 |
4.3 |
3.9 |
Pricing Expectations. Looking ahead 12 months, both large and small manufacturers expect their pricing power to increase. Large firms expect their prices to rise by 2% while small firms expect the prices of their products will increase by a similar 1.9%. This is an increase for both small and large firms compared to the in the first quarter of 2007.
This rebound in pricing power is likely a consequence of increasing demand. Pricing power expectations remain 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. As the dollar has retreated, import prices are no longer deflationary, as such there is less downward pressure on prices than there was 1998-2002 period when the dollar rose in value again most other currencies.
Price Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
| Large |
0.5 |
0.3 |
1.7 |
1.1 |
2.0 |
| Small |
1.1 |
0.7 |
2.1 |
1.6 |
1.9 |
Investment Expectations. Looking ahead 12 months, large manufacturers expect their capital expenditures to rise by 2.3% over the next 12 months, while small companies expect their investment spending to grow by a similar 2.2%. For both large and small firms, this is a mirror image of their expectations in the first quarter. And while these increases are below the expectations during the 2004-2006 period, a time of strong capital investment by businesses, it is greater than the 2001-2003 period of time when there was a significant downturn in business investment.
As a result, the second quarter survey suggests that investment spending by manufacturers will continue to growth in 2007, but at a slower pace than during the past few years.
Investment Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
| Large |
1.5 |
0.9 |
3.1 |
2.3 |
2.3 |
| Small |
2.4 |
0.8 |
2.5 |
2.3 |
2.2 |
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 1.7% over the next 12 months, while small companies expect to reduce inventories spending by 0.6% over the coming year. For large companies, this marks the 13th consecutive quarter that firms expect to reduce inventories over the upcoming 12 months. For small companies, this is the second consecutive decline following very modest increases in inventory investment expectations in 2006.
The survey results are consistent with Census data which show that there was a buildup in inventory/sales ratio in manufacturing during 2006. The responses to the second quarter survey indicate that manufacturers will be working off excess inventories in coming months.
Inventory Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
| Large |
-1.5 |
-1.8 |
-1.0 |
-1.3 |
-1.7 |
| Small |
0.2 |
-0.8 |
0.1 |
-0.5 |
-0.6 |
Employment Expectations. 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 0.3%, while smaller firms expect their employment levels to increase by a stronger 1.7%. 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.
To some degree, these results run counter to the continuous job losses in manufacturing reported by the Labor Department: During the 12 months ending in June 2007, manufacturing employment declined by 191,000. However, 85% of these losses were in sectors closely associated with the housing downturn (wood products, furniture and nonmetallic minerals) and motor vehicles. Recently in recession, these sectors have swung into recovery mode, all posting positive output growth in the second quarter, signaling that the corrections in these industries may be coming to an end. Job growth has been occurring in other sectors of manufacturing, such as aerospace, food and beverage production, fabricated metals, machinery, chemicals, medical equipment, electrical equipment and petroleum.
Responses to this survey indicate that most manufacturing industries will likely expand employment over the coming year, albeit at a modest pace.
Employment Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
| Large |
0.8 |
-0.5 |
0.7 |
0.5 |
0.3 |
| Small |
2.1 |
0.8 |
1.8 |
1.3 |
1.7 |
Wage Expectations. Large survey respondents expect wages to increase by 1.9% over the coming 12 months. This is similar to the 2% expectation reported in the first quarter survey and slightly lightly slower than the 2.5 pace expected in the 2004-2006 period. Small companies anticipate wages to increase by a stronger 2.3% over the coming year. This is stronger than the 2% increase anticipated last quarter and slightly stronger that the 2.2% increase expected during the 2004-2006 period. Note: According to the Bureau of Labor Statistics, manufacturing wages in the second quarter of 2007 were 2.6% higher than a year earlier.
This signals 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 going forward.
Wage Outlook
(12-Month Percent Change Expectation)
| |
1998-2000 |
2001-2003 |
2004-2006 |
2007 (qtr 1) |
2007 (qtr 2) |
| Large |
3.1 |
2.2 |
2.5 |
2.0 |
1.9 |
| Small |
2.9 |
2.0 |
2.2 |
2.0 |
2.3 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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