NAM/IndustryWeek Q1 Survey: Manufacturers Predict Higher Sales, Investment and Employment
Much has been made of the recent resurgence in manufacturing activity. After much slower growth in the middle of 2011, production started to pick up again around October or November. This coincides with manufacturers and the public becoming cautiously more confident in the economy overall, despite a number of persistent headwinds.
This also was evident in thelast NAM/IndustryWeek Survey of Manufacturers released in December. The percentage of manufacturers who were either somewhat or very positive about their business outlook jumped to 80%, up from 65% in the September survey. Americans had become anxious with developments in Europe, the downgrading of the U.S. credit rating, persistent challenges in the labor and housing markets, and tax and regulatory uncertainties. Indeed, the September figure which had plummeted 20 points in just three months mirrored many other sentiment surveys at the time. As confidence started building, business activity increased, new employees were added and consumers began spending again.
The outlook for growth this year improved with the revival in optimism at the end of last year. I am currently predicting 2.6% growth in real GDP in 2012, which is in line with other estimates. Even with slower growth in the middle of last year, industrial production is up 3.4% in the last year and 9.3% in the last two years. In addition, manufacturers have added 111,000 net new jobs in the past three months, or 425,000 since December 2009. Sentiment surveys suggest higher activity in the coming months as well.
This quarter's NAM/IndustryWeek Survey of Manufacturers reflects this optimism. As shown in Figure 1, 88.7% of NAM members responding to this survey had a positive outlook up from 80.2% in December and 65.4% in September. The bulk of these responses (68.3%) said that they were "somewhat positive," up from 55.6% last time. This perhaps suggests a level of guardedness not reflected in the top-line figure -- that manufacturers are cautiously optimistic overall. With that said, the percentage of those saying that they were "somewhat negative" fell from 17.2% to 10.5% since December. Given these responses, we are able to predict, using regression analysis, that industrial production in the manufacturing sector (NAICS) should be 95.5 in the third quarter of 2012. This suggests that industrial production would be 3.9% higher in the third quarter of 2012 than in the same time period in 2011. The model was constructed so that current NAM/IndustryWeek outlook data, along with other variables, can predict industrial production levels six months from now. As Figure 2 shows, it does so with a fairly solid track record, explaining 86% of the variation over the past 14 years. As noted, it suggests continued growth in production over the next two quarters.
In looking at the current challenges facing manufacturers, what is most notable is that fewer respondents cited the weak economy as their primary concern (Figure 4). It dropped from first place to fourth. The top concerns among manufacturers now are an unfavorable business climate and rising energy and raw material costs, with each cited by 60% or more of those taking the survey. (Respondents could pick more than one challenge.) In addition, many of those who volunteered an answer included comments about the tax and regulatory environment and oil and gas prices. A sampling of some of these comments appears at the end. Other major impediments were higher insurance costs, attracting and retaining a quality workforce, and increased international competition. On the latter item, a number of individuals mentioned rising domestic competition as a new challenge. On the talent issue, one respondent added, "No talent available. We are all going after the same people." This sentiment was expressed by others, as well, with some discussing how difficult it was to hire qualified applicants. The skills gap is definitely a challenge, and it is being discussed more and more. President Obama, for instance, has endorsed the Manufacturing Institute's skills certification system, and manufacturers support the America Works Act, which would create a skills credential registry and make workforce training a greater national priority. While the U.S. economy has become less of a concern than in previous surveys, a growing domestic economy was cited by nearly 73% of manufacturers as a primary driver of their future growth (Figure 5). However, several individuals noted slowing global economies and uncertainties in Europe as obstacles that might hinder their growth plans. New product development, increased efficiencies and greater exports were also cited as essential strategies for success.
- "Demand by our customer base to reduce selling price due to international competition." (primary metals or fabricated metal products)
- "No talent available. We are all going after the same people." (machinery)
- "Threat of war with Iran; European debt crisis; general uncertainty throughout the world with regard to political issues." (computer and electronic products)
- "EPA, EPA, EPA." (chemicals)
- "Lack of clarity regarding future federal tax policy, regulation and health care mandates." (miscellaneous manufacturing)
- "Health insurance costs and mandates (up 100% in the last two years)." (food manufacturing)
- "Can't go over 50 employees because then medical insurance will be unaffordable. We are at 49 employees now." (primary metals or fabricated metal products)
- "Reducing training costs by drawing from a trained pool of people. Currently we have hired 140 people since 2009 and another 25 people will be added in 2012. We will interview 150 to get 25. Most do not have the basic foundation to enter the manufacturing workforce nor can they pass a drug screen." (primary metals or fabricated metal products)
- "European economic crisis and its possible domino effect." (electrical equipment and appliances)
- "General inflation in cost of virtually all overhead items." (wood products)
- "Cuts in Defense Dept. budgets." (apparel and allied products)
- "Health insurance costs are a huge issue for profitability." (transportation equipment)