The NAM/IndustryWeek Manufacturing Index -- 4th Quarter 2007
Confidence among large manufacturers eroded again in the fourth quarter of 2007 to the lowest level in four and a half years, with sales expectations falling to their lowest level since the fourth quarter of 2001. Meanwhile, the business outlook for small manufacturers recovered from a modest downturn in the third quarter.
By David Huether, Chief Economist, National Association of Manufacturers
Business confidence, along with sales, investment and employment expectations, ended the year lower than they were in the fourth quarter of 2006. However, these measures remain well above the levels recorded during the 2001 recession. As a result, the NAM/IndustryWeek Manufacturing Index points to sluggish growth for the manufacturing sector in 2008, but not a recession.
Fifty-nine percent of large and 80% 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 fourth quarter of 2007. For small respondents, the rise in confidence in the fourth quarter basically reversed the decline in the third quarter. So, while small companies' optimism ended 2007 at a lower level than during the 2004-2006 period, it remained higher than the 2001-2003 period, when manufacturing went through a deep recession followed by a period of weak growth.
After tumbling 17% in the third quarter, the percent of large manufacturers with a positive business outlook eroded another 4% to 59% in the fourth quarter, the lowest level since the second quarter of 2003.
253 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 second quarter of 2006 to the second quarter of 2007, the business outlook for both large and small manufacturers moderated gradually. This coincided with a deceleration in manufacturing production. While small firms' confidence held steady in the second half of 2007, the percent of large firms with a positive outlook eroded significantly, from 80% in the second quarter to just 59% by the fourth quarter, the lowest level of confidence in four and a half years.
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) |
| Large |
78% |
66% |
88% |
78% |
80% |
63% |
59% |
| Small |
81% |
64% |
85% |
77% |
79% |
76% |
80% |
Sales Expectations. Looking ahead 12 months, both large and small manufacturers expect their sales to continue to increase, but at slower rates than earlier in the expansion. Small firms expect their sales to increase by 3%, which is slower than the expectation during the first half of the year as well as during the 2004-2006 period, when small respondents expected their sales to increase by 4.6%, on average, over the coming 12 months.
Large firms expect their sales to increase by a more-sluggish 2.1% over the next 12 months. This is less than half of the pace during the first half of the year, and the slowest sales expectation since the fourth quarter of 2001.
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) |
| Large |
4.8 |
2.7 |
4.9 |
4.0 |
4.5 |
2.8 |
2.1 |
| Small |
4.0 |
2.4 |
4.6 |
4.3 |
3.9 |
3.1 |
3.0 |
Pricing Expectations. Both large and small manufacturers expect their pricing power to remain stable over the coming 12 months. Large firms expect their prices to rise by 1.7% in 2008 while small firms expect their pricing power to rise a similar 2%. For both large and small companies, these expectations are very similar to survey responses dating back to 2004.
Since 2004, manufacturing pricing power has accelerated compared to the 1998-2003 period, when pricing power for both large and small manufacturers was typically under 1%.
Continued pricing power is likely a consequence of increasing demand as well as the value of the dollar. Since the dollar peaked in February 2002, it has fallen in value by 23%. As the dollar has retreated, import prices have become inflationary, and there is less downward pressure on prices than there was 1998-2002 period when the dollar was on the rise.
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) |
| Large |
0.5 |
0.3 |
1.7 |
1.1 |
2.0 |
1.5 |
1.7 |
| Small |
1.1 |
0.7 |
2.1 |
1.6 |
1.9 |
1.8 |
2.0 |
Investment Expectations. Looking ahead 12-months, large manufacturers expect their capital expenditures to rise by just 0.3%, while small companies expect their investment spending to grow by a stronger 1.6%. For both large and small firms, this is a significant slowdown. For large firms, the 0.3% rise in capital investment spending over the next year is the slowest of the expansion. For small firms, the 1.6% expectation is the slowest in four years.
These trends are consistent with a slowdown in overall business investment spending that has taken place over the past year. The third quarter survey suggests that investment spending by manufacturers will continue to growth over the next year, 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) |
2007
(qtr 3) |
2007
(qtr 4) |
| Large |
1.5 |
0.9 |
3.1 |
2.3 |
2.3 |
0.3 |
1.9 |
| Small |
2.4 |
0.8 |
2.5 |
2.3 |
2.2 |
1.6 |
1.7 |
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 2.2% over the next 12 months, while small companies expect to reduce inventories spending by a more moderate 0.4% over the coming year. For large companies, this is the biggest expected decline in a year, while for smaller firms, a more modest decline is expected than earlier in 2007.
While this is could be correctly interpreted as an expectation of slower growth going forward, another force likely driving inventory investment down is the fact that nationwide, the inventory-to-sales ratio for overall manufacturing reached a four-year high in February of 2007. Since that time, manufacturers have been working down inventories. Therefore, a continuing effort to bring inventory levels back down to their 2004-2006 levels is likely a driving force behind the fourth quarter survey results.
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) |
| Large |
-1.5 |
-1.8 |
-1.0 |
-1.3 |
-1.7 |
-1.9 |
-2.2 |
| Small |
0.2 |
-0.8 |
0.1 |
-0.5 |
-0.6 |
-0.6 |
-0.4 |
Employment Expectations. Small respondents to the fourth quarter survey expect to increase employment by 1.2% over the next 12 months. This is unchanged from the third quarter survey. Meanwhile, large firms expect employment to basically remain unchanged (edging down -0.1%) over the coming year.
For small respondents, the fourth quarter responses were similar to expectations expressed in the in the first three quarters of the year. Still, while employment expectations are positive, they are not as robust as during the 2004-2006 period. This parallels Labor Department data on manufacturing production employment, which rose during the 2004-2006 period and has softened more recently mainly due to spillover effects into manufacturing from the downturn in housing.
For large firms, the fourth quarter expectation of declining employment was the first time since the second quarter of 2005 that respondents anticipated a reduction of employment going forward. This is consistent with the fact that large companies responding to the survey in the fourth quarter are less optimistic and have slower sales 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) |
| Large |
0.8 |
-0.5 |
0.7 |
0.5 |
0.3 |
0.4 |
-0.1 |
| Small |
2.1 |
0.8 |
1.8 |
1.3 |
1.7 |
1.6 |
1.2 |
Wage Expectations. Large survey respondents expect wages to increase by 1.6% over the coming 12 months. This is a slower pace than earlier in the year and, in fact, the slowest expectation in four years. At the same time, small companies anticipate wages to increase by a stronger 2.1% over the coming year. This is very similar to the average pace over the past three years.
The survey results signal 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 2008.
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) |
| Large |
3.1 |
2.2 |
2.5 |
2.0 |
1.9 |
1.9 |
1.6 |
| Small |
2.9 |
2.0 |
2.2 |
2.0 |
2.3 |
2.2 |
2.1 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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