Purchasing Execs on 2018: 'Steady as She Grows'

Even as a pro-business tax reform bill awaits its fate, U.S. manufacturers are investing toward growth. Capital expenditures by U.S. factories outpaced expectations in 2017 and will increase further next year. U.S. manufacturers experienced 11 straight months of growth from January through November, driving the nation’s 2017 purchasing index to 57.4 percent from 51.5 last year.

A majority of purchasing and supply executives – 70 percent – polled by the Institute for Supply Management expect sales will increase in 2018. Revenue will grow 5.1 percent next year, according to the ISM’s December semiannual forecast, compared with 4.6 percent in 2017. “Manufacturing purchasing and supply executives are optimistic about their overall business prospects for the first half of 2018,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee, “with business continuing to expand through the second half of 2018.”

Notably, capital expenditures for 2017 grew more than the 5.2 percent executives predicted in May. “I think we tended to underestimate in this area,” said Fiore. “It looks like we’ll close the year with capex up 8.7 percent with 2018 forecast at 2.7 percent growth. Although that indicates a slower rate, I wouldn’t be surprised if it was underestimated again.”

Manufacturers tend to be conservative when economic policies are in flux. “I think if tax reform kicks in we’ll have a better idea of spending plans six months out,” Fiore said. “Right now, no one knows how manufacturers will approach [tax cuts]—will they invest in stock buybacks; give it to shareholders or reinvest in their business? If companies reinvest I think we’ll see capex at a higher number.”

Most trends were up and to the right for 2017. Production capacity increased 4.3 percent; companies are currently operating at 85.8 percent of normal capacity. Purchasing respondents report that profit margins increased on average during the second and third quarters of 2017; 35 percent experienced an increase in profit margins, 24 percent had lower margins, and 41 percent reported no change. Only one industry -- fabricated metal products -- expects to outpace the electronics, appliances and components segment in 2018. Manufacturing employment grew 2.3 percent in 2017 and is forecast to increase by 1.2 percent in 2018.

Still, employment is a top concern for U.S. manufacturers. A majority of businesses had difficulty filling open positions in 2017. Although 44.4 percent of companies increased wages to attract new hires, 53.1 percent did not. “The percentage of companies that did raise wages is pretty high relative to other measurements,” Fiore said. “About half raised wages and about 60 percent said they trained workers during the year. That indicates companies are willing to invest in their workers.” Labor and benefit costs are expected to increase an average of 2.1 percent in 2018.

ISM’s semiannual survey asked four special questions of its purchasing executive panel. The first asked about the difficulty hiring workers to fill open positions in the past six months. The responses were “Yes” (64.7 percent), “No” (33.8 percent), and “Not applicable (no open positions)” (1.4 percent).

The second special question asked if the firm had raised wages to recruit new hires:

Yes (44.4 percent)
No (53.1 percent)
Not applicable (2.4 percent)

The third question asked if the firm had offered additional training to new hires:

Yes (44.4 percent)
No (50.2 percent)
Not applicable (5.4 percent)

The fourth special question asked whether the firm has increased, decreased or left unchanged its capital spending plans for the next 12 months:

Increased capital spending plans (39.9 percent)
Decreased capital spending plans (16.3 percent)
No change to capital spending plans (43.8 percent)

When asked why in response to the previous question; 66 percent of respondents reported:

General business outlook (5.8 percent)
Prospects for business tax reform (2.9 percent)
Prospects for regulatory reform (13.6 percent)
Other and not applicable (11.7 percent)

Manufacturers are also facing increased prices for raw materials. Price increases averaged 2.1 percent for the year 2017; most supply chain executives expect the prices they pay to increase in early 2018 by an average of 3.2 percent.

The December semiannual manufacturing summary finds:

Operating rate is currently at 85.8 percent.
Production capacity increased by 4.3 percent in 2017.
Production capacity is expected to increase by 2.7 percent in 2018.
Capital expenditures increased 8.7 percent in 2017.
Capital expenditures are expected to increase 2.7 percent in 2018.
Prices paid increased 2.1 percent in 2017.
Overall, 2018 prices paid are expected to increase 1.8 percent.
Labor and benefit costs are expected to increase 2.1 percent in 2018.
Manufacturing employment is expected to increase 1.2 percent in 2018.
Expect growth in U.S. exports in 2018.
Expect growth in U.S. imports in 2018.
Manufacturing revenues are up 4.1 percent in 2017.
Manufacturing revenues are expected to increase 5.1 percent in 2018.
The U.S. dollar is expected to strengthen versus all major trading partner currencies in 2018.
Overall, manufacturing supply managers have an optimistic outlook, with 96 percent of respondents predicting 2018 will be the same as or better than 2017.

Even with challenges, manufacturers report that profit margins increased on average during the second and third quarters of 2017. Overall, expectations are higher between now and May 2018 as 44 percent of respondents forecast better profit margins, 11 percent predict lower profit margins, and 45 percent predict no change.

“I’d say the trend line for U.S. manufacturing is ‘steady as she grows,’” said Fiore. “Operating rates at almost 86 percent is really high and at this point 5.1 percent in revenue growth is twice what is projected for the GDP. Most industries want to match the GDP. Even with price pressure, if new orders continue to come in, manufacturing is on a good trajectory. There’s no sign it will slow down."

The ISM's December report will be released in early January; the full semiannual report is available at www.ismrob.org.