One major change in the economic picture that’s occurred since the beginning of this year is that “we’re starting to see improvement in terms of sentiment,” according to Chad Moutray, chief economist for the National Association of Manufacturers (NAM). He gave a third-quarter update via webcast July 21.
“When I meet with manufacturing leaders around the country, I’m often asked: have we hit rock bottom? Are we now moving in the right direction? Some of our most recent numbers indicate that’s the case,” he said.
Moutray went on to give a cautionary, but mostly positive outlook, citing a number of sources.
The Purchasing Managers’ Index from the Institute for Supply Management has been up for the last four months, he pointed out. “This is a positive sign given where we were before,” he said. The previous five months saw declines.
Two aspects of that index indicate lingering challenges since the first of the year, however. Though the month of June saw slight increases in inventories and in hiring, both those areas remain troublesome, he said.
As far as inventories “stock piles continue to diminish” after a year of such action, he said. As for hiring, Moutray says June’s gains in employment don’t make up for the fact 20,000 workers lost jobs over the first six months of this year. Manufacturing hiring remains sluggish because of caution about the economy, he said.
However, he said that if you want to see the glass as half full, you look at job openings in manufacturing, which continue to be “very strong.” Those numbers reached an all-time high a few months ago and while they’ve fallen a little since then, Moutray says the continued strength means the hiring situation should improve going forward.
The general unemployment rate for the U.S. will fall from the current 4.9%, which Moutray said was already a good number, to 4.7% by year’s end, which bodes well for all industries.
OUTPUT AND OUTLOOK
Overall manufacturing production and capacity utilization saw upward swings in the month of June—manufacturing production was up 0.4% after several months of decline. But Moutray cautioned that year over year, manufacturing output remains stagnant. For 2016, Moody’s data shows manufacturing production growth of 0.6% for this year, but Moutray said he predicts that number will be 1%.
As far as specific sectors of manufacturing, Moutray indicated the industries that fall on the negative growth side are those that are commodity specific such as energy or primary metals and any markets based on the strength of the dollar such as equipment sold to export markets.
But several pockets have developed where positive growth is happening, including motor vehicle markets and any sectors based on the building industry. Moutray predicted the year 2016 will see 1.21 million housing starts, which is “lower than we’d like to see, but positive.” Manufacturing construction spending has seen constant strength and growth since its low point in 2011 (at about $30 billion for private construction put in place in that year to over $80 billion by year’s end 2015); however, energy prices have caused a slight pull back since the first of this year (to less than $75 billion).
Meanwhile, the numbers based on sentiment are seeing improvements and stabilization. For the first time in six straight quarters, the NAM Manufacturers Outlook Survey saw growth in the second quarter of 2016 from 56.6% at the end of the first quarter to 61.7% in the second quarter.
That doesn’t compare, however, to the historic average level of 73.5%, Moutray said.
Confidence from some other sectors shows mixed results. He called both consumers and small business markets “relatively anxious.” But consumers are beginning to show signs of “opening their pocketbooks,” he said. Anything related to housing, such as furnishings, has done well, as has the chemical industry and general consumer goods.
CHALLENGES AND OPPORTUNITIES
NAM members see red tape issues as by far the most significant concern for members, Moutray said. In the latest NAM outlook survey, over three-quarters (75.2%) of NAM members cited unfavorable business climate (e.g., taxes and regulations) as a primary challenge and almost as many (74.5%) listed rising health care and insurance costs. That compares to just over 20% who listed rising raw materials as a primary concern and only about 5.6% who listed restricted access to capital.
Moutray also addressed the export picture for manufacturers and said that currently nine of the 16 countries tracked by the Markit Purchasing Managers’ index are currently on the positive side, which compares to just five in April of this year. Two bright spots are Canada, which was on the negative side at the beginning of this year and parts of Europe, which showed strong numbers in the latest survey (June). However, Moutray cautioned that the most recent data came out just as the Brexit vote was occurring so “we’ll see how those numbers fair post-Brexit.”
Overall, manufacturing activity continues to see sluggish growth, which Moutray says reflects the general economic picture for the country. He said that since the recession, “the new normal” in gross domestic product growth has become about 2% and the next two years will see the same. However, the good news is that the chances of a recession are much less likely than they were at the beginning of 2016, Moutray said. He put them at about 15%, which is not a substantial level.