ISM semiannual report views 2017 as a growth year for manufacturing and non-manufacturing

Supported by decent growth trends in recent months, the December 2016 Semiannual Economic Forecast issued today by the Institute for Supply Management makes it clear that the future looks fairly bright for both the manufacturing and non-manufacturing sectors.

Data for these reports is based on feedback from U.S.-based purchasing and supply chain executives in manufacturing and non-manufacturing sectors.

For manufacturing, ISM data pointed to revenue heading up 4.6 percent in 2017, which is ahead of a 2.8 percent estimate made in May in the previous edition of the report and a 0.6 percent gain for 2016 compared to 2015. And it noted that 67 percent of survey respondents expect 2017 revenues to be higher than 2016.

What’s more, 16 of the 18 reporting manufacturing sectors maintain revenue growth is in the cards for first half of 2017. Capital expenditures are pegged to increase 0.2 percent, trending below May’s estimate of a 1.0 percent gain, and capacity utilization is expected to be up slightly at 81.9 percent, compared to May’s 81.7 percent.

Manufacturing production capacity is expected to rise 2.5 percent in the first half of 2017, which is in line with the previous report’s estimate of 3.0 percent.

Prices paid by ISM manufacturing respondents were off 0.4 percent in 2016 compared to 2015 and are expected to rise 0.9 percent through the first four months of 2017, followed by an additional 0.4 percent gain through the remainder of 2017 for an overall 1.3 percent uptick. And for employment ISM expects a 0.6 percent gain, which is above a May estimate of 0.2 percent. Capital expenditures are pegged to rise 0.2 percent in 2017, coming off of a 7.3 percent 2016 increase.

“The expected 2017 revenue gain of 4.6 percent is a healthy number relative to the 0.9 percent gain for 2016 and serves as a positive indicator for 2017 expectations,” said Brad Holcomb, chair of the ISM’s Manufacturing Business Survey Committee. “While the employment estimate may appear to be low, there are high levels of employment within manufacturing and nationally so we would not expect in any case to have a much stronger number, with labor and benefits expected to rise 2.5 percent for manufacturing in 2017.”

When combining the expectations for revenue gains at 4.6 percent, prices for raw materials at 0.9 percent and labor and benefits at 2.5 percent, Holcomb explained it presents an opportunity to open up margins and raise profitability for the sector.

“The expectations for 2017 are that it will be a solid year,” he said. “Keep in mind we are coming off a year of ups and downs, with the last three reported months [September through November] showed positive PMI (the index ISM uses to measure growth), with some momentum there suggests there could be a continuation of that from an expectation standpoint.”

On the non-manufacturing side, the report said it expected revenues to rise 4.7 percent, up from May’s 2.4 percent projection, with 57 percent of respondents expecting 2017 revenues to be higher than 2016. A 2.7 percent annual revenue increase was also cited in the report. And 14 of the 18 non-manufacturing sectors in the report are calling for increased revenues, up from 13 sectors that anticipated higher revenues in the last report.

Non-manufacturing capital expenditures are expected to fall 0.2 percent, down from a 6.2 percent projection made last May after rising 10.6 percent in 2016, and capacity utilization, which is currently pegged at 85.2 percent, is down compared to May’s 86.5 percent.

Non-manufacturing production capacity, or the capacity to produce products or provide services in this sector, is expected to rise 1.9 percent, ahead of a previous estimate of 1.4 percent. And employment is expected to rise 1.2 percent, down slightly from 1.4 percent, which was called for in May.

Prices paid for non-manufacturing services are expected to increase 1.8 percent in 2017, topping a 0.6 percent call made in the previous report. And ISM said that labor and benefits costs are expected to rise 2.5 percent in 2017, with profit margins expected to increase between December 2016 and April 2017.

“When you look at them, the numbers speak for themselves,” said Tony Nieves, chair of the ISM Non-Manufacturing Business Survey Committee. “The expected revenue gains are good numbers, relative to what we have been seeing in past years for revenue projections. And the 10.6 percent capital expenditures increase for 2016 was huge for capital reinvestment. Even though we are looking at a decrease for 2017, one needs to remember that the 2016 figure is huge, as most companies spend 3 percent of their total revenue for capital reinvestment. That number could go if things stay on the current path.”

Nieves added that the non-manufacturing sector’s operating rate of 85.2 shows how companies have become accustomed to doing more with less since the recession ended.