The domestic manufacturing industry—which appears to be ending 2015 on a sour note – expects moderate growth in 2016. The U.S. manufacturing base in November contracted for the first time in three years, according to the Institute for Supply Management’s leading business index. For 2016, 63 percent of respondents to the ISM’s Semiannual Economic Forecast expect revenues to be greater than in the prior year. The panel of purchasing and supply executives expects a 4.1 percent net increase in overall revenues for 2016, compared with a 1.4 percent increase in 2015.
That growth will be driven by capital expenditures, which are expected to increase by 1 percent in 2016. However, that forecast has significant room for improvement, according to Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee. In April of this year expectations were for an increase of 3.1 percent in capital expenditures; actual expenditures for 2015 increased by 8.3 percent. “This is a fluid and dynamic metric which is starting low but has the possibility to expand,” Holcomb said.
Manufacturers appear to be approaching 2016 cautiously. Employment in the sector will increase by only 0.2 percent in 2016, while labor and benefit costs are expected to increase an average of 1.7 percent. Respondents also expect the U.S. dollar to strengthen against all seven currencies of major trading partners in 2016, as was the case in 2015.
Although the dollar’s strength was cited in the ISM’s monthly surveys as a challenge for domestic manufacturers, the majority of respondents — 60 percent -- to the semiannual questionnaire found the overall impact to be negligible in 2015. Unlike the monthly survey, explained Holcomb, the semiannual forecast balances the effect of the strong dollar – which impacts exports— with the lower-priced raw materials that make up the balance of U.S. imports. “In this case the good news -- lower prices -- offsets the bad news,” said Holcomb. “In spite of hearing [about the strong dollar] during the year, it ultimately doesn’t have an impact when you drill down the numbers.” This was posed as a special question in the semiannual survey.
The impact of the strong dollar on profits was:
- Negative 21.3%
- Negligible 37.9%
- Positive 25.3%,
- Unsure 15.5%
Low gas and oil prices were also cited as a major influence on the monthly PMI index: some industries benefited from energy-related savings while others saw the customers in the oil and gas industries to be struggling. The ISM asked its panel a special question about the impact of low oil prices on profits in 2015.
The results were:
- Negative 13.7%
- Negligible 36.0%
- Positive 43.4%
- Unsure ` 6.9%
Even though some respondents were unsure of the impact of lower oil prices, nearly 80 percent felt lowered oil prices did not have a negative impact on their business.
Outlook for 2016
The second half of 2016 is expected to be better than the first half, manufacturing executives believe. "In 2015,” said Holcomb, “manufacturing experienced 10 consecutive months of growth from January through October, followed by one month of contraction in November, resulting in an average PMI of 51.7 for the first 11 months of 2015. Our forecast calls for more growth in 2016.” The percentage of survey respondents who forecast the second half of 2016 to be better than the first half is 45 percent, while 11 percent expect it to be worse, and 44 percent expect no change.
Purchasing managers in the computer and electronics products sector are among the most optimistic about their prospects for 2016. Only two other manufacturing segments – furniture and nonmetallic mineral products—were more optimistic about their revenue prospects for 2016.
Overall, manufacturers also expect raw materials pricing pressures in 2016 to be very low -- prices paid for raw materials will increase by 0.1 percent during the first four months of 2016, and will increase an additional 0.4 percent during the balance of the year. An overall price increase of 0.5 percent for 2016 compares with a reported 2.6 percent decrease in raw materials prices for 2015. This, combined with an expected revenue increase of 4.1 percent for the year, provides manufacturers with an opportunity for margin enhancement in 2016, Holcomb said.
Purchasers also expect to reverse a recent contraction in exports by the beginning of 2016. Of the 81 percent of ISM respondents who export, 40 percent predict an increase (39 percent moderate and 1 percent substantial) over the next half-year. Thirteen percent of respondents (12 percent moderate and 1 percent substantial) predict a decrease in their exports, and 46 percent anticipate no change in exports over the next half-year.
Purchasers also expect increases in imports in the first half of 2016. Of the 84 percent of purchasers who reported they import, 33 percent predict an increase in their imports over the next half-year (32 percent moderate and 1 percent substantial), while 15 percent predict a decrease in imports of materials (14 percent moderate and 1 percent substantial). Fifty-three percent of survey respondents expect no change in imports in the first half of 2016.