The tide in the manufacturing sector may be turning — at least for larger companies. According to the third quarter Manufacturing Outlook Survey from the National Association of Manufacturing (NAM), large firms (those with 500 or more employees) are more upbeat about their outlook this quarter.
However, small manufacturers (those with fewer than 50 employees) and medium-sized ones (between 50 and 499 employees) experienced declines. Optimistic views are less common among the smallest firms, with just 48.7% having a positive outlook, down from 56.1% in the previous quarter.
Sentiments expressed by respondents have generally stabilized after several quarters of pessimism. What’s more, the data appears to back that assessment, albeit with some caveats, especially as to concerns over rising health care costs and modest growth rates expected in 2017. Overall, the current economic outlook of manufacturers could be characterized as “cautiously optimistic.”
Prime Considerations
In total, 338 manufacturers from all parts of the country participated in NAM’s third quarter study, including a wide variety of sectors and size classifications. Based on the latest data (collected during August), 61% of manufacturers are either “somewhat” or “very” positive about their company’s outlook, down slightly from 61.7% in the June report. Nevertheless, this outlook remains stronger than it was at the end of 2015 and the beginning of 2016.
At the same time, this is the fifth consecutive quarter when positive responses about the outlook have fallen below the historic average of 73%. The index has been below 50 over that timeframe, dipping from 42.3 in June to 41.8 in the recent survey.
Sales and Production
Size differences also are reflected in sales and production expectations. Small firms anticipate sales growth of 1.3% over the next 12 months, but medium and large firms expect an average increase of 2.1%. For production growth, the anticipated difference is 1.6% for small manufacturers as opposed to 2.2% for medium and large companies.
With all firms, sales and production are expected to grow by 1.9% (small) and 2.1% (medium and large) over the next 12 months, up from 1.6% and 1.5%, respectively, from the second quarter. Most importantly, the percentage of respondents expecting sales declines dropped from 23% in the previous report to 16.2% in the recent report.
In addition, plans for capital investments tend to vary according to size. Small manufacturers expect capital spending to decline 0.3% in the next year, while medium and large manufacturers expect capital investment to grow 0.8% and 1.5%, respectively.
Hiring Plans
The survey reports that many firms plan to hire additional workers to meet their cautiously optimistic growth expectations. Full-time employment levels are expected to grow 0.4% over the next year, an improvement of 0.2% from the previous survey.
Many manufacturers (28.5%) expect to hire new workers over the next 12 months, but 52.1% expect no growth in their workforce. Despite lackluster sales and production growth expectations, small and medium-sized manufacturers plan to be more proactive about hiring (anticipating a median increase of 0.6%) than their larger counterparts (who anticipate a median decrease of 0.1%).
The amount that manufacturers invest in stocking their warehouses with materials and finished goods can be an indicator of whether management is stockpiling for an anticipated increase in revenue — or it’s cutting back to conserve working capital during an expected slowdown.
The survey found that, overall, manufacturers plan to decrease inventories by 0.7% over the next 12 months, the sixth consecutive quarterly decline. A closer look at the responses show that about one-third of respondents (34.1%) plan to reduce their inventories, but 20% plan to invest more money in inventories.
Top Challenges
Nearly three-quarters of manufacturers surveyed cite rising health insurance costs as their top business challenge. They see costs increasing 8.5% over the next 12 months, up from 8.3% in the previous survey. Specifically, 75.2% expect an average increase in premiums of at least 5% next year, with 40.3% predicting average costs to jump by at least 10%. Small and medium firms anticipate greater increases (9.4%) than large manufacturers (6.3%).
Respondents also list an unfavorable business climate as a major concern: 73.6% placed it as the primary challenge behind health care costs. Furthermore, manufacturers continue to be frustrated with the lack of comprehensive tax reform and a perceived regulatory assault on business. (See “Cutting through the Red Tape” at right.) Just over three-quarters (76.6%) think the United States is on the wrong track, with only 6.8% saying they feel we’re heading in the right direction. The remaining respondents are uncertain about the industry’s current course.
Coming Soon
NAM publishes its Manufacturing Outlook Survey at the end of each quarter. The next survey, for the fourth quarter of 2016, is expected to be released on December 7.
Cutting Through the Red Tape
The Manufacturing Outlook Survey addresses the issue of regulatory challenges. Most respondents (88.8%) either somewhat or strongly disagree that the federal government carefully considers interests of small business owners when it imposes new regulations
Among other drawbacks, the manufacturers surveyed believe that government regulation:
- Stifles economic growth (69%),
- Disproportionately hurts small businesses (39.2%),
- Creates bureaucratic red tape (34.3%),
- Slows innovation (18.5%), and
- Costs taxpayers money (15.2%).
Most manufacturers recognize that the government needs to implement rules to help protect the environment, provide a safe workplace and ensure fairness in competition. Yet, many believe that the cumulative costs of ever-increasing regulations outweigh the perceived benefits.
