Purchasing managers for the manufacturing industries in the U.S. expect growth will continue throughout the remainder of 2018. Sixty-two percent of the respondents to the Institute For Supply Management’s Semiannual Economic Forecast expect their revenue in 2018 will be 11.6 percent higher than in 2017; the industry will average 6.6 percent growth.
In fact, every metric measured by the ISM for 2018 is up and to the right. With operating rates at 85.8 percent, an expected capital expenditure increase of 10.1 percent, a 5 percent increase for raw materials prices, and employment expected to increase by 1.8 percent by the end of 2018 compared with 2017, manufacturing is positioned to grow revenue while managing costs through the remainder of the year.
“With 15 of the 18 manufacturing sector industries predicting revenue growth in 2018, when compared to 2017, U.S. manufacturing continues to move in a positive direction. However, finding and onboarding qualified labor and being able to pass on raw material price increases will ultimately define manufacturing revenues and profitability,” said Timothy R. Fiore, chair of the ISM’s Manufacturing Business Survey Committee.
Procurement managers believe they are facing several economic headwinds: labor, tariffs and raw materials prices. Still, a 10.1 percent increase in capital expenditures is “notably higher” than the 2.7 percent increase predicted in December 2017, according to the ISM. Thirty-four percent of manufacturing respondents predict they’ll increase capital expenditures, and 52 percent said they’ll spend the same as in 2017. Among those that expect to increase capex, the general business outlook and recent tax reform are cited as the reasons.
Businesses that manufacture and sell electronics components also cite component shortages and allocation as possible hinderances. Most manufacturers and component distributors can fulfill their current demand, but many are prioritizing existing customers and not taking on new orders for allocated products.
“We believe we're managing to the demand,” said Mike Long, CEO of the industry’s largest components distributor Arrow Electronics Inc., during its Q1 2018 conference call. “[We’re not managing to] some expected demand that could be out there or even the conversation around double ordering right now.”
Purchasing and supply management executives predict an overall net increase of 6.6 percent in sector business revenue for 2018 over 2017. This is 1.5 percentage points higher than the 5.1-percent increase forecast in December 2017 for all of 2018, and 2.5 percentage points higher than the 4.1-percent increase reported for 2017 over 2016. Of the 15 industries predicting increased revenue, electronics companies fall midway between the highest and lowest expectations.
Overall, expectations for production capacity nearly doubled from 2017’s prediction: capacity is expected to increase 4.9 percent in 2018, reflecting continuing strength in the manufacturing sector. Of the 15 manufacturing industries that expect to increase capacity, segments of the electronics industry ranked 11th and 15th.
However, increased prices also outstripped 2017’s forecast. In the December 2017 survey, respondents predicted an increase of 1.3 percent in prices paid during the first four months of 2018; they now report prices actually increased by 4.8 percent. Seventy percent of respondents expect prices to increase during the remainder of 2018 by 7.3 percent, reported the ISM. Of the 18 industries that expect price increases, electronics companies ranked toward the middle of the list.
In addition to higher materials prices, manufacturers expect to be paying more for labor. A full 77.9 percent of respondents had difficulty hiring workers to fill open positions, the ISM found. More than 53 percent raised wages. Only 47.9 percent offered additional training for new hires while 52.1 percent did not.
If or when the U.S. finally imposes tariffs on steel and aluminum, almost 74 percent of manufacturers expect the price of the goods they manufacture to increase. In turn, these manufacturers expect to pass on an average 5.4 percent price increase to their customers. Nearly 58 percent of manufacturers expect tariffs to disrupt their supply chains while 42.5 percent expect they will not.
In summary, the ISM’s semiannual manufacturing forecast reports:
- Operating rate is currently at 85.8 percent of normal capacity.
- Production capacity is expected to increase 4.9 percent in 2018.
- Capital expenditures are expected to increase 10.1 percent in 2018.
- Prices paid increased 4.8 percent through the end of April 2018.
- Prices of raw materials are expected to increase 5 percent for all of 2018, indicating an expected increase of 0.2 percent in prices for the remainder of the year.
- Manufacturing employment is expected to increase by 1.8 percent in 2018.
- Manufacturing revenue is expected to increase 6.6 percent in 2018.
- Overall, manufacturing is expected to exhibit a positive growth trend in 2018.
The 18 industries surveyed by the ISM are food, beverage and tobacco products; textile mills; apparel, leather and allied products; wood products; paper products; printing and related support activities; petroleum and coal products; chemical products; plastics and rubber products; nonmetallic mineral products; primary metals; fabricated metal products; machinery; computer and electronic products; electrical equipment, appliances and components; transportation equipment; furniture and related products; and miscellaneous manufacturing.