The Year Ahead for Manufacturers

January 8, 2013

Share Like Tweet Add Email

The last 12 months were tough on U.S. manufacturers, with economic pressures, instability in global markets, and uncertainty about domestic policies taking a heavy toll on business growth. But with the start of a new year, many manufacturers are hoping for a strong rebound. Can U.S. industrial firms expect brighter prospects in 2013?

Manufacturers faced a broad range of challenges over the past year, as the financial crisis in the European Union coupled with a general slowdown in international markets hindered overseas demand for U.S.-made goods, and uncertainty stemming from the fiscal cliff forced many companies to scale back or cut their investment and hiring plans. Although issues like the fiscal cliff have been temporarily addressed, these burdens are likely to weigh on the industrial sector in the early months of 2013.

According to the latest industrial outlook report from the Manufacturers Alliance for Productivity and Innovation (MAPI), manufacturing had a mixed year in 2012, with production growing by a robust 10 percent in the first quarter, before plummeting to 1 percent growth in the second quarter, declining by 1 percent in the third quarter, and finishing the year with 1.5 percent growth in the fourth quarter.

The trend of sluggish growth is expected to continue through 2013, with manufacturing production forecast to grow by just 2 percent this year. MAPI predicts that 14 of the 24 industries tracked will expand in 2013, led by a 28 percent gain in housing starts and a 16 percent increase in aerospace products and parts production. Non-high-tech manufacturing production, which constitutes nine-tenths of total output, is expected to increase 1.8 percent this year.

Despite better prospects for certain industries, the overall manufacturing growth rate is relatively slow, and this can largely be attributed to broader stagnation in the economy, fueled by tougher conditions for the consumer market.

"The outlook is for modest GDP growth throughout 2013 but it will not be until the second half of 2014 that the economy will grow at what could be called a moderate pace,” Daniel J. Meckstroth, chief economist at MAPI, said in an analysis of the findings. “Consumers continue to deleverage from debt and therefore can only increase spending commensurate with after-tax income adjusted for inflation. Less unemployment insurance income and increases in state and local taxes have eaten away at personal income gains. And while credit is more available it is not plentiful. As a result, consumer spending can increase only at a sluggish pace.”

Other forecasts for the manufacturing sector provide a more negative perspective about the near future. According to the latest NAM/IndustryWeek Survey of Manufacturers, the number of manufacturers who were optimistic about their company’s outlook fell to 51.8 percent at the end of 2012, a far cry from the peak of 88.7 percent in March.

"This decline potentially foretells of further weaknesses in the economy moving into 2013,” IndustryWeek notes. “Using regression analysis, we are able to predict industrial production two quarters from now. In the last survey which was released in September, the business outlook value corresponded to a 1 percent drop in industrial production for the manufacturing sector.”

Based on the current projections, industrial production is expected to drop by 2 percent between the fourth quarter of 2012 and the second quarter of 2013, while investment should decrease 0.6 percent and employment should inch down 0.4 percent. Moreover, 27 percent of manufacturers expect their sales to drop in 2013, up from 16.6 percent who said the same in September.

Much of the slowdown is linked to contraction in international markets, as the U.S. manufacturing sector depends heavily on exports to key trading partners. Respondents to the NAM/IndustryWeek survey expect export sales to grow by just 0.7 percent in 2013.

The outlook also differs depending on the size of the firm. On average, small manufacturing firms (those with fewer than 50 employees) expect their sales to increase just 0.5 percent over the next 12 months, compared to a 1.6 percent projected increase among larger manufacturers. Fifty-seven percent of small manufacturers expressed a negative outlook, compared to 44 percent of medium-sized businesses and 47 percent of large businesses.

Despite these negative signs, 26.6 percent of manufacturing businesses expect sales to increase by more than 5 percent this year, indicating that many companies continue to prosper in the face of challenging market conditions.

Findings from the Institute for Supply Management (ISM) paint a significantly sunnier picture for 2013. ISM found that 62 percent of manufacturers expect revenues to be higher this year than in 2012, with purchasing and supply executives forecasting a 4.6 percent net increase in overall revenues.

Capital expenditures, which make a significant contribution to U.S. economic health, are expected to increase 7.6 percent in the manufacturing sector. However, employment is expected to be relatively muted, climbing just 0.8 percent in 2013, while labor and benefit costs are expected to increase an average of 1.7 percent.

“Manufacturing purchasing and supply executives expect to see continued growth in 2013. They are optimistic about their overall business prospects for the first half of 2013, and are even more optimistic about the second half of 2013," Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee, noted. "Manufacturing experienced five consecutive months of growth from January through May 2012, while four of the last six months from June through November 2012 registered slight contraction…but our forecast for 2013 calls for a resumption of growth in 2013. Respondents expect raw materials pricing pressures in 2013 to be higher than in 2012, and expect their margins will improve slightly.”

Although the economic recovery has been fragile and slow, the U.S. manufacturing sector remains one of the largest and most successful in the world. A recent global survey from Deloitte found that executives around the world consider the U.S. to be the third most competitive manufacturing market, following China and Germany.

“Executives surveyed noted several advantages that improved U.S. appeal as a manufacturing destination, including a core competency for talent-driven innovation,” Deloitte explains. “The country also received high scores with respect to its physical infrastructure, established supplier network, and strong legal and regulatory systems. Other noted policy advantages that further strengthened U.S. competitiveness included intellectual property protection laws and technology transfer, adoption, and integration.”

Some government policies provide a competitive disadvantage, as well. According to Deloitte, restrictive environmental regulations, energy policies, corporate taxes, and healthcare policies contribute to a less competitive manufacturing climate in America. As a result, in the long-term, U.S. competitiveness is expected to slip to fifth place by 2018.

 

Share Like Tweet Add Email

LIKE THIS ARTICLE? DON’T MISS OUT ON OTHERS! Get Thomasnet’s industry newsletter now

Comments

comments powered by Disqus