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ISM Semiannual Forecast Promises Revenue & Production Capacity Lifts

Supply chain executives and procurement pros in manufacturing in the U.S. expect the economy to continue to grow throughout 2019, according to the latest economic report from the Institute for Supply Management (ISM). At the same time, many in the manufacturing sector said tariffs are negatively impacting business and the supply chain. Nearly 60% believe that tariffs have raised the price of goods on average about 6.8%. Nearly 30% believe tariffs have caused delays and disruptions in the supply chain.

Still, business growth looks good in 2019. Fifty-five percent of respondents to ISM’s Spring 2019 Semiannual Economic Forecast expect their revenues in 2019, on average, will be four percent greater compared to 2018. Eleven percent expect an 11.1% drop and 34% expect revenues to remain steady.

Overall, manufacturers forecast an average growth rate of four percent in 2019. This is down 1.7 percentage points from the December 2018 forecast of 5.7% revenue growth and 1.8 percentage points below the actual revenue growth in 2018.

However, overall expectations in the manufacturing sectors are positive in 2019 with increases reported for just about every metric. With an operating rate of 84.2%, an expected capital expenditure increase of 5.9%, an increase of 1.5% for prices paid for raw materials, and employment expected to increase by two percent by the end of 2019, manufacturing is positioned to grow revenues while managing costs through the remainder of the year, according to the report.

“With 17 of the 18 manufacturing sector industries predicting revenue growth in 2019, 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.

Overall, production capacity increases in 2019 nearly mirrors revenue growth. Production capacity in manufacturing is expected to increase 4.5% in 2019. Although this increase is less than the 4.7-percent increase forecast in December 2018, it is slightly greater than the four-percent increase reported for 2018. Reflecting continued strength in the sector, said ISM, 37% of respondents expect an average capacity increase of 13.8%, while six percent expect decreases averaging 9.9%, and 57% expect no change.

Procurement managers expect capital expenditures to remain fairly stable in 2019, compared to last year. Survey respondents expect a 5.9-percent increase in capital expenditures in 2019, which is nearly even with the six-percent increase predicted in the December 2018.Thirty-two percent of respondents said they will increase capital expenditures in 2019, with an average increase of 29.3%, and 12% said their capital spending would decrease an average of 27.7%. Fifty-five percent said they’ll spend the same in 2019 as they did in 2018. Among those who expect to increase capex most cited the general business outlook as the key reason. 

However, purchasing managers report a reversal in pricing trends. In the first four months of 2018, they reported that price rose 4.8%. They also forecast an increase of 3.5% in prices paid during the first four months of 2019 in December 2018, but now report that prices increased by only 1.5%. 

Overall, 44% of respondents expect prices to increase by 4.8% in 2019, compared to the end of 2018. However, survey respondents expect a net average increase of 1.5% in 2019.

The memory device market, for example, is experiencing significantly lower prices in 2019, indicating that component shortages and allocations that drove up prices over the past few years are finally coming to an end, although there are still a few trouble spots in the electronics supply chain.

Although price increases may be dropping, manufacturers can expect to continue paying more for labor. Seventy-six percent of respondents had difficulty hiring workers to fill open positions, according to the ISM. Slightly more than 53% raised wages, while 44.4% offered additional training for new hires. Employment is expected to increase by two percent by the end of 2019.

In summary, the ISM’s semiannual manufacturing forecast reports: 

  • Operating rate is currently at 84.2% of normal capacity.
  • Production capacity is expected to increase 4.5% in 2019.
  • Capital expenditures are expected to increase 5.9% in 2019.
  • Prices paid increased 1.5% through the end of April 2019.
  • Prices of raw materials are expected to increase a total of 1.4% for all of 2019, indicating an expected decrease of 0.1% in prices for the remainder of the year.
  • Manufacturing employment is expected to increase by two percent in 2019.
  • Manufacturing revenue is expected to increase four percent in 2019.
  • Overall, manufacturing is expected to grow in 2019.

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.

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