Manufacturing activity has stalled of late, global sales are slowing and the threat of going over the fiscal cliff looms. These are contributing factors to a sharp decline in manufacturers’ optimism, which has plummeted from 88.7% in March to barely more than 50% today.

Add in the U.S. economy’s modest growth this year—most likely up 2% in the current quarter and for the year—and it’s easy to understand why business leaders are increasingly more worried about their business’s prospects.

The most recent NAM/IndustryWeek Survey of Manufacturers finds that 84.2% of respondents said that political uncertainties—including the fiscal cliff and budget sequestration—were their top challenge. These anxieties are dampening hiring and investment and reducing overall optimism

Figure 1: Manufacturing Business Outlook, 2000-2012  | Note: Percentage of respondents who characterized the current business outlook as somewhat or very positive. Percentages are annual averages.

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A look back at earlier survey results illustrates steadily declining sentiment. This troubling trend does not bode well for manufacturers in the United States or the 12 million people they employ. In March, 88.7% of manufacturers were either somewhat or very positive about their company’s outlook. This optimism fell to 83.1% in June and 69.2% in September. In the fourth quarter, the outlook fell even further to 51.8%, its lowest point since the second quarter of 2009. The number of manufacturers who responded as “somewhat negative” in their outlook nearly tripled in the past six months, from 15.8% in June’s survey to 38.9% in the fourth quarter.

This decline potentially foretells of further weaknesses in the economy moving into 2013. Using regression analysis, we are able to predict industrial production two quarters from now. In the last survey which was released in September, the business outlook value corresponded to a 1% drop in industrial production for the manufacturing sector.

Manufacturing production was 1.7% lower in October than it was in July, or 0.9% from September. While Hurricane Sandy contributed to some of the recent decrease, the data suggest larger weaknesses since the summer. The current outlook predicts a drop in industrial production of 2%t between now and the second quarter of 2013) , with essentially no year-over-year growth.

This might be consistent with a fiscal cliff scenario, or it is simply the statistical result of the overly pessimistic responses. However, this model has a fairly solid track record, explaining roughly 90% of the variation since 1997.

With reduced sales expectations, manufacturers appear to be pulling back on their hiring and capital spending plans. Both measures turned negative in this survey for the first time since the fourth quarter of 2009.

 

Figure 2: Predicted Industrial Production (Manufacturing NAICS)
Note: Industrial production is predicted two quarters in advance by regressing NAM/IndustryWeek Survey of Manufacturers data as one of the independent variables, with data stretching back to Q4:1997. Other explanatory variables include current values for housing permits, the interest rate spread, personal consumption and the S&P 500.

Investment and employment should decrease on average by 0.6% and 0.4%, respectively, over the next year. This represents a shift from the past survey, which anticipated gains of 1.2% and 0.7%, respectively. These results indicate that more than one-third of manufacturers expect decreases in capital spending plans in 2013, with almost 27% seeing reduced employment. Of course, this is not true for all firms, as 15.6% plan capital spending increases of 5% or more, and 17.7% intend hiring increases of up to 5%.This increased negative outlook can also be seen in manufacturers’ responses on expected sales, employment and capital spending for the next 12 months. We began the year with businesses anticipating 4.7% more sales on average on a year-over-year basis. That significantly declined to 2.5% in September, and it has now plummeted to just 1%.

More than 27% of manufacturers now expect their sales to fall in the next year, up from 16.6% in September. On the positive side, 26.6% predict sales increases of 5% or more. This indicates that there are businesses that are prospering despite the headwinds they are facing, but it also shows just how mixed the overall results are.