What is in this article?:
- Manufacturing sector is expanding very slowly, if at all
- Manufacturers' business outlook rose slightly in second quarter
- Top concern continues to be rising cost of health insurance
- Manufacturers' hiring plans remain somewhat skittish
- Manufacturers are struggling to boost exports
- Manufacturing activity may pick up in second half of 2013
The U.S. economy has been a mixed bag during the first half of 2013. We have made some progress, particularly when looking at the all-time highs in the stock market or the consumer confidence measures that are now at levels not seen since before the financial crisis. Real GDP is growing modestly, up 2.4% in the first quarter, and it is expected to rise 1.8% in the current quarter. Much of that increase can be attributed to decent gains in consumer spending and steady increases in housing construction, both of which have helped boost output and lift sentiment.
Despite these positive signs, there continue to be weaknesses in the economy and in the manufacturing sector that are holding back growth. In addition, concerns remain high over the implementation of the Affordable Care Act (ACA) and the unfavorable business climate due to taxes and regulation.
Most of the domestic and global measures of output, sales and employment for manufacturers indicate that the sector is expanding very slowly, if at all. The Institute for Supply Management’s Purchasing Managers’ Index illustrates this point with its May reading of 49.0, its first contraction since November. Sluggish new orders at home and abroad have reduced activity, with slowing export sales, higher taxes and reductions in government spending providing a drag on growth.
To illustrate this point, we only need to look at the mediocre growth rates over the past 12 months for industrial production, up just 1.3%. Ideally, we would like to see manufacturing output rise 4% or greater annually to sustain growth and create jobs. This phenomenon is not unique to the United States, with manufacturing activity increasing very slowly globally. This slow growth has hindered manufacturers’ ability to grow exports, which were up just 1% in the first three months of this year relative to the same time period last year.
While the long-term health of manufacturing in the United States should be robust, the short-term prognosis has been disappointing. There has been some progress since the end of 2012 when businesses were pulling back prior to the fiscal cliff deal. However, these gains have been modest and appear to have stalled during the spring. In the last NAM/IndustryWeek Survey of Manufacturers report, I described this as “a complicated mix of both progress and enduring headwinds.” That depiction still seems fitting, particularly as the latest survey’s findings were not much different than they were three months ago. Manufacturers need momentum, not stagnation.
The percentage of respondents who characterized their current business outlook as positive rose slightly from 70.1% in March to 72.3% in June. The proportion identifying themselves as “somewhat positive” (60.6%) was essentially the same in this survey as the last, with fewer people saying they were “somewhat negative” (down from 28.2% to 24.4%). This was the largest difference between the two surveys. As noted in the previous survey, these results show some improvement from December’s low of 51.8%, but they are still well below the high of 88.7% in March 2012. There are still far too many manufacturers that view their business outlook as negative.
Manufacturers were asked about average health insurance premium increases. As evidence of the increased worry about what lies ahead after implementation of the ACA, respondents had an average premium increase of 8.4% in 2012, 8.6% in 2013, and 13.9% in 2014.
The top concern among manufacturers continues to be the rising cost of health insurance, cited by 82.2% of respondents in this survey. That is up from 74.0% in the previous survey, and it is a sign of increased anxieties related to the ACA. In a series of special questions on health care, virtually all respondents said that they offered insurance coverage to their employees, with 38% saying that they self-insured. At the same time, more than 56% were either not prepared or uncertain about how their firm planned to implement the ACA at the beginning of 2014. Along those lines, a surprisingly large percentage (41.2%) said that they were uncertain if their business would join a health insurance exchange later this year. Manufacturers still have questions, and as a result, many have not fully internalized the changes that they need to undergo to comply with the new law.
Many of the responses for next year noted the uncertainties about what their premium increase might be. There is definitely a perception that premiums will go up significantly in 2014. Along those lines, the ACA also introduces a 40% tax on high-cost health insurance plans beginning in 2018. Respondents were asked if they planned to reduce their coverage to avoid the so-called “Cadillac” tax—23.3% said they would, with 39.3% uncertain.
Political concerns, in general, still rank toward the top of the list of challenges for manufacturers. Frustrations with the political process and an unfavorable business climate both tied for the second-most challenging issue at 66.9%. The fact that political uncertainties and the unfavorable business climate still rank so high is a reflection that manufacturing leaders remain concerned about the U.S. fiscal situation and the political discourse in Washington as well as tax and regulatory concerns.