NAM/IW Q4 Survey: Manufacturer Optimism Spikes

Manufacturers are becoming more confident in the economy as the year is winding down. In the last NAM/IndustryWeek Survey of Manufacturers -- which was released in September 2011 -- respondents were mostly positive, but they were significantly less optimistic than earlier in the year. They were confronting a number of challenges, thus increasing anxieties and depressing their sales.

Businesses have had to cope with supply chain disruptions, natural disasters, rising energy and raw material prices, continued weaknesses in U.S. labor and housing markets, and fiscal and financial pressures in the U.S. and Europe. In light of these uncertainties, the number of manufacturers saying that they were either "somewhat positive" or "very positive" about their business outlook dropped over 20 points in the third-quarter survey.

Since then, there have been signs of improvement in the domestic economy, and manufacturing activity has started to pick up again. Industrial production is up 2.1% year to date (through October) and 9.2% since December 2009. Other indicators also point to higher production levels this quarter and next year, with sentiment surveys from the Institute for Supply Management and various regional Federal Reserve Banks expressing renewed strength.

The latest NAM/IndustryWeek Survey of Manufacturers mirrors this view. As Figure 1 shows, 80.2% of NAM members responding to this survey have a positive outlook -- up from 65.4% in September. While this is still below the 86.4% reading of June, it reflects a nice turnaround in confidence. The response was 13% lower for individuals saying that they are "somewhat negative," while the "somewhat positive" and "very positive" responses both edged higher. Even though uncertainties remain, particularly with regard to European sovereign debt, business confidence is clearly higher, which is boosting expectations for 2012.

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This assessment carries forward into manufacturers' forecasts for sales, employment and capital spending plans for next year. Over 72% of NAM members expect their sales to increase over the next 12 months, with an average expected increase of 4.4%. This exceeds the 3.2% projection from the previous survey, yet it is below the 5.5% finding from June. Nonetheless, it suggests that manufacturers anticipate production will pick up significantly. In fact, roughly half of them expect for sales to grow by at least 5%, and one out of five predicts sales growth will exceed 10% next year.

Listen To the PodcastWhat is driving optimism among manufacturers for 2012? NAM Chief Economist Chad Moutray comments on the findings of the 4th Quarter IW/NAM Manufacturing Survey in an interview with IW Executive Editor Steve Minter.Overall hiring and capital spending are predicted to grow by 1.8% and 2.8%, respectively. Those figures had been 1.4% and 1.5%, respectively, in the previous survey. There was also a modest uptick in employment expectations, and businesses' investment plans rose more dramatically. In terms of capital spending intentions, 52% plan to increase their investment, while 36% anticipate no changes.

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Manufacturing wages are expected to rise by 1.4% over the next 12 months, with 55% of respondents suggesting increases of less than 3%. Inventories will more or less stay flat, with the average expected increase at 0.3%. This finding echoes government data suggesting that businesses are doing a good job of managing their inventories relative to sales. Prices for final goods are anticipated to go up by 2% in the next year, slightly lower than the 2.2% prediction in the last survey.

International trade continues to represent a tremendous opportunity for manufacturers. Over 44% expect to export more products next year, with 20% calculating increases of more than 5%. Trade remains very important for manufacturing growth. Of those companies anticipating higher exports, one-third are "very positive" in their business outlook. This compares to 18.3% for those expecting fewer exports or no change in exports.

In addition to the North American market, NAM members see the greatest potential for trade in Asia, according to a special question on the topic. Central and South America and Europe were also cited as ideal markets. Since the last survey, Congress has passed free trade agreements with Colombia, Panama and South Korea. Regarding future trade agreements, half of manufacturers feel that the President needs to request trade promotion authority from Congress -- something that has not been in place since 2007. Twenty-eight percent of the respondents are uncertain, suggesting that this issue has not fully resonated with the public.

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Despite some economic improvements, manufacturers remain anxious. The dominant business challenge continues to be the weak domestic economy and poor sales, and 26.3% of those taking the survey cited this as their top concern. The rest of the list nearly mirrors the ordinal ranking from the previous survey, with an unfavorable business climate and rising energy and raw material costs rounding out the top three. The inability to attract and retain a quality workforce -- a new addition to this quarter's survey -- was cited by 13.5% of manufacturers as the fourth most pressing challenge. Of those who volunteered an answer, many expressed frustration with the political process and, in particular, with the federal government's ability to tackle its fiscal problems.

A stronger domestic economy will be important for the manufacturing sector to thrive moving forward. Nearly 37% of manufacturers said that increased domestic sales of their products are the top driver for their future growth. New product development, increased efficiencies and greater exports were also cited as essential strategies for success.

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Size continues to be an important determinant for how each of these firms responds to the survey. Smaller firms with less than 50 employees have greater optimism this quarter. This stands in contrast with the last quarter, when medium-sized firms (with 50 to 499 employees) were the most positive. Small businesses have the highest expected average sales increase -- 5.4% versus roughly 4% for both medium and larger firms. With that said, large businesses (500 or more employees) have the greatest percentage of respondents who are "very positive" about their business outlook, at 28.1%.

The NAM/IndustryWeek Survey of Manufacturers has been conducted quarterly since 1997. This survey was conducted among NAM membership between November 18 and November 30, 2011, with 269 manufacturers responding. Responses were from all parts of the country, in a wide variety of manufacturing sectors and in varying size classifications. Aggregated survey responses appear on the following pages. The next survey is expected to be released in March 2012.

Survey Responses

How would you characterize the business outlook for your firm right now?
1. Very positive - 24.6%
2. Somewhat positive - 55.6%
3. Somewhat negative - 17.2%
4. Very negative - 2.6%
Over the next year, what do you expect to happen with your company's sales?
1. Increase more than 10 percent - 21.6%
2. Increase 5 to 10 percent - 29.0%
3. Increase up to 5 percent - 21.6%
4. Stay about the same - 19.7%
5. Decrease up to 5 percent - 3.3%
6. Decrease 5 to 10 percent - 2.2%
7. Decrease more than 10 percent - 2.6%
  Average expected increase in sales consistent with these responses = 4.4%
Over the next year, what do you expect to happen with prices on your company's overall product line?
1. Increase more than 10 percent - 1.9%
2. Increase 5 to 10 percent - 14.5%
3. Increase up to 5 percent - 38.7%
4. Stay about the same - 40.1%
5. Decrease up to 5 percent - 3.3%
6. Decrease 5 to 10 percent - 0.4%
7. Decrease more than 10 percent - 1.1%
  Average expected increase in prices consistent with these responses = 2.0%
Over the next year, what are your company's capital investment plans?
1. Increase more than 10 percent - 22.8%
2. Increase 5 to 10 percent - 13.1%
3. Increase up to 5 percent - 16.1%
4. Stay about the same - 36.3%
5. Decrease up to 5 percent - 3.0%
6. Decrease 5 to 10 percent - 1.9%
7. Decrease more than 10 percent - 6.7%
  Average expected increase in investment consistent with these responses = 2.8%
Over the next year, what are your plans for inventories?
1. Increase more than 10 percent - 3.0%
2. Increase 5 to 10 percent - 10.8%
3. Increase up to 5 percent - 13.4%
4. Stay about the same - 51.9%
5. Decrease up to 5 percent - 9.7%
6. Decrease 5 to 10 percent - 8.2%
7. Decrease more than 10 percent - 3.0%
  Average expected increase in inventories consistent with these responses = 0.3%
Over the next year, what do you expect in terms of full-time employment in your company?
1. Increase more than 10 percent - 6.0%
2. Increase 5 to 10 percent - 11.2%
3. Increase up to 5 percent - 29.5%
4. Stay about the same - 43.7%
5. Decrease up to 5 percent - 7.5%
6. Decrease 5 to 10 percent - 0.7%
7. Decrease more than 10 percent - 1.5%
  Average expected increase in full-time employment consistent with these responses = 1.8%
Over the next year, what do you expect to happen to employee wages (excluding non-wage compensation such as benefits) in your company?
1. Increase more than 5 percent - 1.5%
2. Increase 3 to 5 percent - 22.7%
3. Increase up to 3 percent - 55.4%
4. Stay about the same - 18.6%
5. Decrease up to 3 percent - 1.1%
6. Decrease 3 to 5 percent - 0%
7. Decrease more than 5 percent - 0.7%
  Average expected increase in wages consistent with these responses = 1.4%
Over the next year, what do you expect to happen with the level of exports from your company?
1. Increase more than 5 percent - 19.9%
2. Increase 3 to 5 percent - 8.8%
3. Increase up to 3 percent - 15.3%
4. Stay about the same - 52.9%
5. Decrease up to 3 percent - 2.3%
6. Decrease 3 to 5 percent - 0.4%
7. Decrease more than 5 percent - 0.4%
  Average expected increase in exports consistent with these responses = 1.3%
What are the primary drivers of your company's future growth strategies?(Respondents were able to check only one response.)
1. Increased efficiencies in the production process - 15.4%
2. Increased international sales - 15.0%
3. New product development - 22.2%
4. Recent mergers or acquisitions - 3.7%
5. Stronger domestic economy, sales of our products - 36.8%
6. Other - 6.8%
What are the biggest challenges you are facing right now? (Respondents were able to check only one response.)
1. Attracting and retaining a quality workforce - 13.5%
2. Challenges with access to capital or other forms of financing - 2.2%
3. Increased international competition - 5.6%
4. Rising energy and raw material costs for our products - 16.9%
5. Rising insurance costs - 5.3%
6. Unfavorable business climate (e.g., taxes, regulation, etc.) - 22.6%
7. Weaker domestic economy, sales of our products - 26.3%
8. Other - 7.5%
What is your company's primary industrial classification?
1. Apparel and allied products - 0.7%
2. Beverages and tobacco products - no responses
3. Chemicals - 6.0%
4. Computer and electronic products - 2.2%
5. Electrical equipment and appliances - 5.6%
6. Food manufacturing - 3.0%
7. Furniture and related products - 2.2%
8. Leather and allied products - no responses
9. Machinery - 10.1%
10. Miscellaneous manufacturing - 15.4%
11. Nonmetallic mineral products - 1.5%
12. Paper and paper products - 1.1%
13. Petroleum and coal products - 0.4%
14. Plastics and rubber products - 8.6%
15. Primary metals, or fabricated metal products -30.7%
16. Printing and related activities - 2.2%
17. Textile mills or textile products - 0.4%
18. Transportation equipment - 5.6%
19. Wood products - 3.8%
What is the size of your firm (e.g., the parent company, not your establishment)?
1. Less than 50 employees - 21.3%
2. 50 to 499 employees - 54.5%
3. 500 or more employees - 24.3%
If you are actively engaged in international trade, which of the following countries or regions do you see as having the greatest potential over the next 5 to 10 years for growth within your company?
1. Africa - 11.8%
2. Asia - 23.5%
3. Central and South America - 9.4%
4. Europe, including Russia - 8.8%
5. North America, including the United States - 55.3%
6. Other - 1.8%
Currently, the President does not have trade promotion authority to negotiate new free trade agreements that can then pass Congress on an up-or-down vote. Do you advocate for the President to request trade promotion authority legislation from Congress?