ISM’s latest semiannual report optimistic on 2023 growth prospects

Despite recent manufacturing contraction, the outlook for the manufacturing- and services-based economy is pointed towards growth, according to the December 2022 “Semiannual Economic Forecast,” which was recently issued by the Institute for Supply Management (ISM).

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

For manufacturing, ISM is estimating a 5.5% revenue gain in 2023, falling short of its 6.5% estimate from its predecessor report in May and its 9.2% 2022 growth rate. And 45% of manufacturing respondents indicated that 2023 revenues will see an average increase of 14.9%, with 12% of respondents calling for an average decrease of 10.3% and another 43% predicting flat revenues. The report found that 15 of the 18 surveyed manufacturing sectors expect 2023 revenue gains.

Manufacturing capital expenses (capex) are expected to head up 2.6% in 2023, with 2022 up 12%, ahead of the May report’s 7.4% estimate. The report observed that 45% of purchasers reporting increased 2022 capex indicated an average increase of 33.9%, with 44 saying spend levels were flat in 2022, while 12 manufacturing sectors pointed to 2022 capex growth.

Manufacturing capacity utilization, or operating rate, came in at 88.4, a 0.8% uptick over the May report’s 87.2% reading, and below the December 2021 88.7%, its highest reading going back to 2016. Raw materials prices paid rose 11.4% in 2022, amid record-high inflation levels, and in line with May’s 11.1% projection, with 2023 pegged to see a 2% gain. Manufacturing employment is expected to be up 3.9% in 2023, ahead of the report’s projected 3.2% 2022 estimate.

The report also found that 27% of manufacturing supply managers are predicting that 2023 will be better than 2022, with 27% indicating 2023 will end up being worse than 2022.

“Manufacturing’s purchasing and supply executives expect to see overall growth in 2023,” said Tim Fiore, Chair of the ISM Business Survey Committee, in the report. “They are pessimistic about overall business prospects for the first half of 2023, but project growth returning in the second half. According to the ISM Report On Business, manufacturing grew for 29 consecutive months from June 2020 through October 2022 but dipped into contraction in November after declining in five out of the previous six months. Respondents expect raw materials pricing pressure to increase in 2023, but still see H1 2023 profit margins improving over H2 2022. Wages and employment will continue to grow. Manufacturers also predict growth in both exports and imports in 2023.”

Services outlook: ISM member panelists are calling for 2023 services-based economy revenues to see a 3.1% gain in 2023, topping 2022’s 2.1% gain, which fell short of May’s 4.9% estimate. The report found that 47% of respondents reported better business in 2022 compared to 2021, with an average revenue increase of 9.1%, whereas 18% said business was off by an average of 12.3%, for the same period, with 35% saying they had no change. The report added that 13 services sectors saw revenue gains in 2022.

Services production capacity, or the capacity to produce products or provide services in this sector, saw a 3.9% increase in 2022, topping its May estimate., at 1.2%, with production and provision capacity expected top see a 3.4% increase in 2023.

Services capex saw a 6% gain in 2022, trailing a 6.2% May estimate, with 2023 pegged to be up 2.8%. And prices paid jumped 11% in 2022, like manufacturing, seeing an inflation-led increase, with 2023 expected to see an 8.4% increase.

The report also observed that services employment is expected to be up 1% in 2023, and export and import levels are each expected to see gains. What’s more, ISM found that 31% of its services respondents are calling for 2023 to see overall improvement compared to 2021.

“Services supply executives report operating at 89.9 percent of normal capacity, slightly less than the 91 percent reported in May 2022,” noted Tony Nieves, Chair of ISM’s Services Business Survey Committee, in the report. “They are optimistic about continued growth in the first half of 2023 and expect more growth in the second half, with a projected increase in growth rate for capital reinvestment. They forecast that their capacity to produce products and provide services will rise by 3.4 percent during 2023, and capital expenditures will increase by 2.8 percent. Services panel members also predict their overall employment will increase by 1 percent during 2023.”