June 6 , 2011
Last week produced a series of reports showing weakness in the manufacturing sector and the overall economy. For those following economic indicators of late, these data were not a surprise. Since the first quarter of this year, economic activity has slowed down significantly, most notably in manufacturing, which had experienced healthy increases prior to that. Here are some of the takeaways from the data, as I see it:
- Supply disruptions stemming from Japan continue to be a challenge for manufacturers. This can be seen most clearly in the automotive sector. New factory orders in transportation fell dramatically in April, according to both the Census Bureau and the Chicago Federal Reserve Bank. The Bureau of Labor Statistics also saw a decline of 8,800 jobs in the sector in May.
- Rising raw material and energy prices are taking a toll on the economy. Consumers and businesses alike are feeling the squeeze of higher costs, with consumer confidence falling and manufacturers citing high raw material prices as a major concern. When you look at the sectors that lost employment, such as food manufacturing, leisure and hospitality, or retail trade, this becomes even more clear.
- With all of that said, the manufacturing sector continues to grow, albeit much more slowly than in previous months. The ISM Purchasing Managers' Index fell dramatically from 60.4 in April to 53.5 in May, which was a much steeper decline than many economists had expected. This decline was led by decreases in new order and shipments, particularly in transportation equipment but also in other areas. Nonetheless, the indicator is still above 50, suggesting a growing sector. Moreover, a number of recent surveys, including those from the regional Federal Reserve banks and RSM McGladrey, have noted positive expectations regarding future production. (Note that the NAM/Industry Week Survey of Manufacturers, which will be released next week, also observes a positive business outlook.)
Of course, the economy remains a top concern for many Americans, and even for those manufacturers who are optimistic about the general outlook, there remains a degree of uncertainty moving forward. Accordingly, it is important for policymakers to pursue policies that help to promote economic growth, open new markets for our goods and services, and provide a fertile business environment that will allow manufacturing firms to flourish.
This week, there will be a number of indicators that will gauge the health of manufacturing and the economy as a whole. On Tuesday, the Bureau of Labor Statistics will release job openings and labor turnover data, following on the heels of last week's employment numbers. On Wednesday, the Federal Reserve Board will release its Beige Book, which examines the economic health of each of its regions. To a certain extent, we have seen previews of this report already with a number of regional surveys, including ones from the Chicago and Dallas Federal Reserve Banks last week (and discussed below). Lastly, on Thursday, we will get new trade statistics, which will hopefully continue to highlight a current strength in manufacturing – the exports of our products.
Chad Moutray
Chief Economist
National Association of Manufacturers
MANUFACTURERS REMAIN CAUTIOUSLY OPTIMISTIC, CONCERNS LINGER OVER ECONOMY AND RAW MATERIAL PRICES
With so many gloomy economic indicators last week, it is sometimes easy to lose track of the fact that manufacturers continue to grow, albeit slower the past couple months than earlier this year. Many in the manufacturing industry are cautiously optimistic moving forward. We saw this in recent regional Federal Reserve Bank surveys, for instance, that manufacturers have favorable expectations of the next six months in terms of production, new orders, exports, etc. While the indices for these expectations might have fallen a little in the latest survey, they remain strong.
Today we rolled out the results of the National Association of Manufacturers (NAM)/IndustryWeek Survey of Manufacturers which paints a similar picture of cautious optimism. Over 86 percent of the respondents had a somewhat or very positive characterization of their business outlook. This was the highest reading in five years (see the accompanying chart below). Moreover, they are forecasting strong sales over the next year, with the average expected sales increase of 5.4 percent for the respondents.
With such high expectations of sales, manufacturers are also planning to hire additional workers, invest in new capital equipment, and pursue more export opportunities. Wages are expected to go up an average of 1.8 percent, with some firms predicting much higher increases.
Despite such positive news, manufacturers continue to worry about the economy, as it was their top concern. Note that, while this NAM/IndustryWeek Survey of Manufacturers has been conducted quarterly since 1997, the question about top concerns is new. Thus, we cannot say whether economic concerns have risen or fallen from prior surveys.
The next-highest top concern is the price of raw materials. This is definitely in line with other economic reports which indicate that manufacturers continue to be squeezed by higher costs. Many respondents to this survey cited specific examples of how rising raw materials were negatively impacting their businesses. In addition, nearly three-fourths of manufacturers filling out this survey suggested that they will need to raise prices this year.
There were also other findings of note. First, international trade represents a major opportunity for manufacturers, and nearly 45 percent of them said that they planned to increase exports over the next twelve months. Moreover, those entities which planned to increase their overseas presence were more likely to be positive in their business outlook. Second, smaller manufacturer with less than 50 employees were generally positive in their forecasts, but less so than their medium and large-size counterparts.
Overall manufacturers are optimistic about the future but also have voiced several reasons to remain cautious. I encourage you to take a look at the complete survey results and listen to my podcast on the results on the IndustryWeek site.
Chad Moutray is chief economist, National Association of Manufacturers.
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