U.S. Manufacturing Sector to Grow Strongly through 2013

May 1, 2013

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Bradley Holcomb, chair of the Manufacturing Business Survey Committee for the Institute for Supply Management, said the manufacturing sector is solid thus far in 2013 and will continue to see steady growth for the rest of the year.

Holcomb, who presented the latest ISM manufacturing performance data at ISM’s International Supply Management Conference in Dallas-Fort Worth, said the sector will see healthy increases in production capacity (6.7 percent) and capital expenditures (9.1 percent) and a moderate rise in raw materials prices (2.3 percent) for the rest of 2013. Manufacturing employment will be largely the same (up 0.9 percent).

Based on the numbers through April, Holcomb commented that there was “an optimistic framework” for continued growth this year, noting that inflation “will not be a factor” and that moderate price upticks for raw materials will enable manufacturers to control costs “quite well.”

Business revenues among manufacturing companies – a good indicator of overall sector growth – will rise by 4.8 percent this year.

Manufacturing will be buoyed by an economy that has strong fundamentals and is reaccelerating into 2014. In fact, according to Bernard Baumohl, chief global economist at the Economic Outlook Group, who spoke after Holcomb at the Business Survey/Economic Outlook presentation, 2013 and 2014 will be the two strongest years for the economy in a decade.

Baumohl, a prominent economist, said consumer spending, which drives 70 percent of the U.S. economy, is at its highest levels in two years, while there is pent-up demand for goods (as evidenced by an upswing in new orders) as well as a budding housing market rebound. Consumer financial health will drive spending confidence, which in turn will boost capital spending, investments, and production among companies.

“The fundamentals of the economy are at their best in five years,” Baumohl noted. “Household debt service burden (credit card, mortgage, and car loan debt) is really low, which means consumers will have more means with which to spend. New home sales and retail sales are picking up, and corporate earnings have been strong, as companies are sitting on a record pile of cash." Banks are also loosening personal and business credit as a result of delinquency rates falling “precipitously,” he said.

“Inflation essentially is a non-issue, and we’re seeing the benefits of falling energy prices,” Baumohl added, noting the oil and gas industry boom. “CEOs are more optimistic and confident about the outlook for the U.S. economy.”

In fact, Baumohl said, strong fundamentals will enable the economy to withstand the effects of the federal sequester: “The economy will weather it quite well. Companies anticipated it.”

The bottom line, he said, is that the economy will be resilient, barring any unpredictable shocks. Baumohl acknowledged that Washington remains a wild card, noting that partisanship on economic issues could be a hindrance to growth.

That was reflected in an audience poll during the presentation, in which 53 percent of attendees indicated that budget battles in Washington and fiscal uncertainty have “clearly hurt” business so far this year. In another poll, 38 percent indicated that higher taxes are the most likely threat that businesses will face in the next 12 months.

Another pain point is employment. Baumohl remarked that with price competition being “really serious out there,” keeping margins tight, companies have a laser focus on improving productivity. According to him, “Labor is the most expensive part of operating costs. Companies are doing more with less.”

Data indicates that small firms and midsize businesses are the major sources of current job growth. Small firms have added 280,000 jobs thus far in 2013, followed by midsize businesses with 195,000 jobs, and large corporations with 96,000 jobs.

Touching on the high-skilled labor gap, Baumohl said that vocation schools, technical schools, and community colleges are now “jam-packed,” as those who have been out of work look to either prevent or reverse “skills atrophy.” Still, he said, “There are now more people at work than we’ve seen in the last four years.” He noted that there must be greater federal investment in education to strengthen the economy in the long-term.

 

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