Business conditions in the manufacturing sector continue to improve—though at a slower rate than economists and business leaders would like. A host of recent manufacturing outlook reports point to consistent growth for the remainder of the year followed by an uptick in the first months of 2017, at the same time pointing to headwinds such as weak business investment and a high inventory-to-sales ratio—at both manufacturers and wholesalers—which will keep the sector on the low end of the growth scale.
The Manufacturers’ Alliance for Productivity and Innovation (MAPI) lowered its 2016 forecast this fall, predicting just 0.2% U.S. manufacturing growth this year. Looking ahead, MAPI economist Dan Meckstroth predicts a swing toward modest growth of 1.6% and 2.5% in 2017 and 2018, respectively. The group also notes that manufacturing is not expected to fully recover from the 2008-2009 recession until the fourth quarter of 2020.
“The high inventory-to-sales ratio, overvalued dollar, low commodity prices, [and] little pressing need to invest are significant headwinds for manufacturing,” Meckstroth wrote in a September economic update, pointing to the need for manufacturers to continue to pare down inventory. “We expect production growth volatility will continue through the third quarter of this year and result in slow manufacturing production growth. With the inventory cutting ending soon, manufacturing should be able to string together consistent growth in the final three months of the year.”
Separately, the National Association of Manufacturers reported in September that sentiment among U.S. manufacturers had stabilized following several months of decline. Sixty-one percent of manufacturers surveyed for the report said they were either somewhat positive or very positive about their company’s outlook, down slightly from 61.7% reported in June but above the 56.6% reported at the start of the year. Survey respondents said they expect sales and production growth of roughly 2% over the next 12 months.
Looking at inventory, NAM found that manufacturers continue to cut back, as most expect inventory levels to fall 0.7% over the next 12 months, declining for the sixth consecutive quarter—a factor that could bode well for production levels if demand accelerates in the new year. “In this survey, 34.1 percent anticipate declining inventory stocks, with roughly one-fifth predicting increases,” the survey authors said. “There is, however, a silver lining from this decline. If demand picks up significantly, manufacturing output would have to accelerate substantially to match the increased sales.”
Buyers Remain Upbeat
Sentiment among buyers picked up heading into the final quarter of the year, as the Institute for Supply Management’s Purchasing Managers Index (PMI) moved into growth territory in September following a one-month decline. The 12-month average PMI as of September was 50.3, above the 50-point mark indicating expansion in the manufacturing economy. ISM is due to release its October PMI report November 1.
More than 700 buyers of electronic components surveyed by Global Purchasing this fall expressed similar sentiments, with nearly half (47%) saying their economic outlook for the coming year is either very positive (6%) or somewhat positive (41%). Almost a third of respondents said they have a neutral economic outlook (30%) and nearly a quarter (23%) said they have a very negative (3%) or somewhat negative (20%) outlook.
Anecdotally, buyers said their economic optimism is based largely on advancing technology and the growth potential of the electronics industry in general. Many pointed to increased demand for smarter, “connected” products and systems across a wide range of industries. The need for buyers to source a wider variety of components to meet those demands is a byproduct of the trend. Buyers said they are called upon to provide greater product knowledge (39%) and to source a wider variety of components (36%) these days. They also said they are challenged to find new sources of products (33%) and to meet shorter time-to-market demands (20%).