ISM Semiannual Economic Forecast looks at 2018 as a growth year

Once again, the outlook for economic growth in the manufacturing and non-manufacturing sectors remains positive, according to the most recent edition of the Institute for Supply Management’s (ISM) Semiannual Economic Forecast, which was released today.

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 6.6% gain in 2018 revenue, which is ahead of the 5.1% reading in the December Semiannual report. What’s more, it noted that 62% of respondents maintain their 2018 revenues to rise by 11.6% on average, although, conversely, ISM found that 5% of manufacturing respondents expect their revenues to fall 11.9% on average. Revenue is expected to see growth this year in 15 of the 18 manufacturing industries.

2018 manufacturing capital expenses (capex) are pegged to see a 10.1% gain, which dwarfs December’s 2.7% estimate, with 34% of respondents calling for gains in capex at an average increase of 42.1%. On the other end, 14% of respondents expect 2018 capex to see a decrease of 30.5% on average. Capacity utilization, which came in at 85.8%, was flat compared to December’s reading. And production capacity is estimated to increase 4.9% this year, ahead of December’s 2.7% estimate.

Raw materials prices are expected to see a 5% increase in 2018, and prices paid headed up 4.8% through April, coupled with an expected 0.2% for the balance of 2018. ISM added that the report indicated all 18 manufacturing sectors expect price gains in 2018. Manufacturing employment is expected to rise 1.8% in 2018.

“The 6.6% revenue growth estimate is really positive and very consistent with what has been happening with the PMI (the index ISM uses to measure growth),” said Tim Fiore, chair of the ISM’s Manufacturing Survey Business Committee. “The top line continues to expand, with everything else really being a management challenge. The 4.9% expected growth in production capacity is also positive, even with current employment constraints.”

One key area of concern for manufacturing, cited by Fiore, is the estimated 5% gain in pricing for 2018, which may not be sustainable.

“Generally, supply managers are looking at 1.5-to-2% in a moderate growth environment and at least try to keep prices flat through productivity measures, but at 5% I am not sure how to combat that,” he said. “For most of our respondents, materials are 50% of revenues and with 5% growth on that number that will seriously soften margins if it cannot be passed through to end customers. If that happens, profitability will be very good, but we’ll be looking at inflation gains near the end of the year.”

On the non-manufacturing side, the report expects revenues to rise 3.2% in 2018, down from December’s 6% estimate, with 49% of respondents saying they expect 2018 revenues to rise 7.1% compared to 2017. And 16 of the 18 non-manufacturing sectors are calling for higher revenues, down from 17 in December’s report.

Non-manufacturing production capacity, or the capacity to produce products or provide services in this sector headed up to 4.9%, topping December’s 2.7%, and capex, at 6.8% is down slightly from 7%. ISM said 29% of respondents expect capex to increase by 30.6%, with 7% expecting an average decrease of 29.1%.

Prices paid for non-manufacturing are expected to increase 2.1% in 2018 compared to the end of 2017, with prices up 1.3% through the first four months of 2018 and an additional 0.8% increase pegged over the remainder of 2018. Non-manufacturing capacity utilization, or the operating rate, at 85.5%, is down from December’s 91.9%, and non-manufacturing employment is expected to rise 1.5% in 2018.

“The 85.5 operating rate was down a bit from December,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Survey Business Committee. “But it gets to a point of how high can it really go really without experiencing some sort of capacity constraint? Revenue was down from December’s forecast, which is a ‘cooling off’ there, even though it is still good revenue growth.”

The dip in non-manufacturing capex was not as optimistic as December’s reading was. But Nieves explained some things came into play from the first quarter into the second quarter, with respondents now feeling more confident that there are more dollars for capital reinvestment.

For non-manufacturing pricing, Nieves said there has been good cost containment in recent years, with most month-to-month price increases related to fuel and other volatile commodities.

“Prices have been managed well by the supply management people…but we are starting to see some effects of inflation and tariffs coming into play as it relates to pricing,” he said. “We are not seeing a sharp jump in inflation at this time.”