When you speak with manufacturers today about the economy, their outlook is often a complicated mix of both optimism and cautiousness. On the one hand, it is true that the manufacturing sector has been a bright spot in the economy since the recession, providing outsized contributions to both output and employment. Moreover, there is a sense that the sector is poised for continued expansion over the coming years, thanks largely to America’s newfound energy abundance and the increased competitiveness of the sector globally. As such, conversations with manufacturing leaders about the coming decade tend to be rather “bullish.”
This quarter’s National Association of Manufacturers (NAM)/IndustryWeek Survey of Manufacturers reflect this, as we have seen the highest expected sales (up 4.1%) and capital investment (up 2.3%) figures in two years. Along those lines, manufacturers also see an improving economy (75.1%), new product development (57.3%) and increased efficiencies in the production process (48.6%) as the biggest drivers for future growth. In addition, over the next 12 months, nearly 40% of manufacturers expect their export sales to increase, with another 57.1% saying their international orders should stay the same.
However, manufacturers expressed a palpable sense of frustration both with the slowness of economic growth and with the political process. Washington’s burdensome regulatory, tax and health care policies still loom large in business decisions, particularly for the smallest manufacturers. While we have moved beyond the budget showdown of last fall, concerns continue to mount that Washington is not solving the country’s problems. In the most recent survey, 79.3% of respondents said that the country was on the “wrong track,” with just 5% suggesting that it was “headed in the right direction.” One individual from the machinery sector might have summarized these feelings appropriately with this comment:
We need less Democrats and less Republicans and more smart people that are willing to tackle the longer-term issues with compromise. Not as a bulldozer and not with BS, but something that all Americans can believe in and actually trust.
This year has started out a bit weaker than originally hoped. A number of severe winter storms wreaked havoc with demand and production in the early months, and exports continue to grow at a disappointingly slow rate. Indeed, in the first quarter, real GDP shrank for the first time in three years, and while we have seen a rebound in the spring months, overall activity levels remain below the more robust rates seen at the end of 2013. Already, we have seen forecasts for growth in 2014 downgraded from around 3% a few months ago to something closer to 2.5% today.
Figure 1: Manufacturing Business Outlook, by Quarter, 2012–2014
Note: Percentage of respondents who characterized the current business outlook as somewhat or very positive.
Despite recent slowness, it is perhaps interesting that manufacturers in the United States have largely shrugged off much of the softer data in the early months of 2014. In fact, they continue to be mostly upbeat in their outlook for the rest of this year. In the most recent NAM/IndustryWeek Survey of Manufacturers, 85.9% of respondents were either somewhat or very positive about their own company’s outlook (Figure 1). This fell slightly from 86.1% who said the same thing in March. In essence, manufacturers’ outlook was mostly unchanged from the first quarter, even as the longer-term trend suggests a business community that is more upbeat—particularly since the fiscal cliff. In fact, while growth has been a bit disappointing so far this year, we have also begun to see a spring rebound in output and demand, inspiring hope for a better second half.
As such, manufacturers reported mostly higher expected activity levels across the board over the course of the next 12 months (Figure 2). For example, sales are expected to grow 4.1% on average over the next year, up from 3.0% six months ago and 3.6% in the last survey. In fact, the pace of sales growth marks the fastest in two years—definitely a sign of progress on the demand front. In this survey, nearly three-quarters of respondents said they anticipate sales to increase in the coming months, with 47.5% predicting sales growth of 5% or more.
Capital Investment, Employment Moving in Right Direction
Capital investment and employment both continued to move in the right direction, with both measures recording their best rates of growth since the second quarter of 2012. Manufacturers plan to increase capital spending by 2.3% over the next 12 months, up from 1.4% and 1.9% in the past two surveys, respectively. Meanwhile, 49% of survey respondents expect to increase their hiring over the next year, up from 42% three months ago. On average, firms plan to increase their employment by 1.7% in the next year, a significant bump up from the 0.9% pace reported in December.
Figure 2: Expected Growth of Manufacturing Sales, Investment and Employment, 2010–2014
Note: Expected growth rates are annual averages.
It is worth noting that 41.5% of manufacturers in the NAM/IndustryWeek survey said that their capital spending levels will be greater this year than last. While this is a positive development—and probably the result of recent improvements in the economy—it also suggests that more than half of those responding were not experiencing increases. In fact, 39.1% of those taking the survey said their capital investment levels will remain unchanged from last year, and 15.4 percent cited lower levels of capital spending in 2014 than in 2013. Firms investing in more capital largely attributed the increase to new products or process innovations (49.4%), the need to increase capacity (48.8%), increased demand (46.3%) and equipment replacements (38.1%).
As usual, firm size mattered in the data. Sales expectations over the next 12 months ranged from an average of 3.3% for small manufacturers (those with fewer than 50 employees) to 3.9% for medium-sized firms (those with between 50 and 499 employees) to 5.1% for larger entities (those with 500 or more employees). Larger manufacturers were also more upbeat in their outlook (93.0% were positive) and in their capital spending plans (2.9% growth over the next 12 months versus 0.9% for small firms). On the hiring front, medium and large businesses expect to increase their worker totals by nearly 2%, with small manufacturers adding just 0.9% more workers over the next year.
Exports will continue to drive growth for manufacturers, but the U.S. market is also extremely vital. When asked about the primary drivers of future growth, three-quarters of respondents said that a stronger domestic economy was the key to their strategic plans (Figure 3). At the same time, 42.4% of respondents cited increased international sales. Moreover, manufacturers anticipate a 1.6% increase in export sales on average over the next year, up from 1.3% in the last survey. In all, nearly 40% of those taking the survey anticipate higher exports in the coming months, with 15.9% expecting international sales growth of at least 5%.
Figure 3: Primary Drivers of Future Growth, Second Quarter, 2014
Note: Respondents were able to check more than one response. Therefore, responses exceed 100%.
Figure 4: Predicted Industrial Production (Manufacturing North American Industry Classification System)
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.
Meanwhile, manufacturers anticipate their inventories to increase 0.5% over the next 12 months, rising for the second straight survey. Prior to that, respondents expected stockpiles of finished goods to decline in six consecutive reports from the third quarter of 2012 to the fourth quarter of 2013. In fact, the predicted inventory growth rate peaked since the first quarter of 2012, when the manufacturing sector was expanding rather robustly. In this survey, 31.2% of respondents forecast inventories growing in the coming year, with 23.5% foreseeing declines.
For several quarters now, we have used the NAM/IndustryWeek outlook data in a regression model to predict manufacturing production two quarters ahead (Figure 4). Other variables include current values for housing permits, the interest rate spread, personal consumption and the S&P 500. This model explains roughly 89% of the variation since the data began in the fourth quarter of 1997.
The current model is very encouraging and suggests that manufacturing production should continue to accelerate, growing at a 4.0% annual rate over the next two quarters. Consumer spending, improvements in housing and the rising stock market provide positive influences that help to reach this conclusion. Of course, downside risks could derail this projection, including geopolitical risks, uncertainties surrounding the Affordable Care Act (ACA), reactions to monetary policy changes and increased regulatory burdens that might negatively impact the manufacturing sector.
The numbers clearly show that Washington continues to be the major source of burdens facing manufacturers. The top business challenge, cited by nearly 73% of those taking the survey, was rising health care and insurance costs (Figure 5). This issue has hovered near the top of the list for much of the past two years, with manufacturers still anxious about the ACA and its implications. This was closely followed by a perceived unfavorable business climate due to taxes, regulations and continuing government uncertainties.
Figure 5: Primary Current Business Challenges, Second Quarter, 2014
Note: Respondents were able to check more than one response. Therefore, responses exceed 100%.
The other challenge that rises toward the top of the list of concerns is the inability to attract and retain a quality workforce (50.3%). In fact, just more than 60% of respondents said that they were struggling to fill open positions at their company. With the lack of talent readily available, manufacturers are addressing the skills gap in the following ways: creating or expanding internal training programs (60.0%), working their existing workforce more (57.2%), utilizing temporary staffing services (49.3%) and collaborating with educational institutions on skills development (48.4%). With these factors in mind, the NAM has made workforce issues one of its top priorities this year, establishing the Task Force on Competitiveness & the Workforce and advocating for more Americans to seek high-skilled jobs within the sector.
Looking for Long-Term Solutions
Beyond workforce issues, manufacturers continue to seek long-term solutions to the nation’s problems. We once again asked for them to list the top policies they would like to see implemented over the next few years, and not surprisingly, many focused on budget and fiscal issues (Figure 6). While we have seen the annual budget deficit fall recently, manufacturers recognize that the United States has failed to find a long-term deal that would bring down those deficits and debt more permanently, and as a result, deficits will again begin to rise in the next few years, largely due to growth in entitlement spending. Finding a way to slow the growth of entitlement spending (84.4%) and to tackle our debt and deficits (82.9%) topped the list of policy priorities of manufacturers responding to this survey.
Figure 6: Top Policies That Manufacturers Want to See from Policymakers Over the Next Few Years
Note: Respondents were able to check more than one response. Therefore, responses exceed 100%.
Manufacturers also seek relief from the regulatory process (81.9%), with cumulative burdens becoming an ever-larger concern. Some of the sample comments focused on this as well, including requests for the government to be more “business friendly,” to eliminate “undo paperwork” and to limit the number of new rules making their way through the process. Other top priority areas include controlling rising health care costs (78.5%), passing comprehensive tax reform (72.3%), implementing an “all-of the-above” energy policy (48.6%) and addressing the skills gap (42.7%). (For a partial listing of comments in this survey, see the end of this report.)
On the issue of taxes, several key provisions for manufacturers expired at the end of 2013. One was enhanced Section 179 expensing, which allows smaller companies to write off up to $500,000 of capital equipment immediately if they invest less than $2 million in a year. Along with enhanced Section 179 expensing, the so-called bonus depreciation, available to companies of all sizes, expired as well. Bonus depreciation allowed taxpayers to expense 50% of the cost of assets bought and placed into service in 2013. In a series of special questions on this topic, 23.6% of respondents said they were holding off on making investments until Congress extends Section 179 expensing or first-year bonus depreciation.
We asked about investment intentions if Section 179 and bonus depreciation were not extended and found that 35.8% of manufacturers said that they would not make any investments this year without these provisions. In addition, another 5.1% replied that they would not make any purchases at all. That is a significant portion of businesses that would be negatively impacted by the loss of these investment incentives. Moreover, timing for re-enacting such incentives also matters. More than half of those surveyed said there would not be enough time to make capital spending purchases and put these capital expenditures into place by year’s end if these incentives are not extended until mid-November. Therefore, passing these measures after the election might not have the desired effects in 2014 that we would prefer.
The NAM/IndustryWeek Survey of Manufacturers has been conducted quarterly since 1997. This quarter’s survey was conducted among NAM membership between May 15 and 30, with 326 manufacturers responding. Responses came from all parts of the country, in a wide variety of manufacturing sectors and in varying size classifications. Aggregated survey responses appear below. The next survey is expected to be released on Monday, September 8.
Sample Comments
- “Be more business friendly. Stop increasing fees/taxes on small business that could put them out of business.” (Machinery)
- “Concern on increased taxes, fees and possible loss of [Last In, First Out].” (Machinery)
- “Controlling rulemaking by agencies outside Congress, particularly the [National Labor Relations Board].” (Electrical equipment and appliances)
- “Lack of long-term U.S. transportation bill.” (Primary metals or fabricated metal products)
- “Russia–Ukraine situation is challenging for our business.” (Machinery)
- “Skilled machinists are impossible to find.” (Primary metals or fabricated metal products)
- “Slowdown in mining and uncertainty. How much further will coal mining fall due to current Administration policies in coal.” (Primary metals or fabricated metal products)
- “The competition is increasing production capacity and will be more aggressive in the marketplace.” (Paper and paper products)
- “Uncertainty on the part of my customers.” (Machinery)
- “Weakness in the defense sector.” (Miscellaneous manufacturing)
- “We built automated production systems for other manufacturers. Increased productivity is driving that demand, not new products.” (Machinery)
- “We need less Democrats and less Republicans and more smart people that are willing to tackle the longer-term issues with compromise. Not as a bulldozer and not with BS, but something that all Americans can believe in and actually trust.” (Machinery)
- “We need to replace the exports that we used to ship to the Ukraine and Russia.” (Primary metals or fabricated metal products)
