The head of one of the nation’s closely watched manufacturing indexes says the rest of 2014 will be “blue skies ahead” for manufacturers following a short slide early in the year caused by winter weather.
In a one-on-one interview with ThomasNet News at the recent International Supply Management Conference in Las Vegas, Bradley Holcomb, chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee, said the U.S. manufacturing sector will see revenue and production output increases and be aided by moderate supply price growth and fewer economic and political headwinds.
“The message is positive for the rest of this year,” said Holcomb, based on his analysis of the latest quarterly survey of 350 purchasing and supply executives at medium and large manufacturing companies across the country who report business conditions to ISM. “The weather had some short-term impact, but it’s mostly behind us,” Holcomb added. “There are rising levels of confidence among consumers and CFOs, and this confidence is real. There is pent-up demand in the housing market, and our forecast shows contained, nominal price increases for the foreseeable future.”
The latest ISM numbers point to 5.3 percent average revenue growth for manufacturers in 2014, an increase of 0.9 percent when compared to the association’s last forecast conducted in December. Sixty-eight percent of manufacturing supply management executives predict that their revenues will be 9.1 percent greater than in 2013. Survey respondents expect net average prices to increase 1.5 percent for the entire year, or 0.1 percent lower than the reading taken in December.
Moreover, all 18 industries covered by the ISM manufacturing business survey reported expectations of revenue growth. “That has never happened before under my watch,” Holcomb exclaimed. “If you look at these numbers collectively, there is plenty of room for margin growth for manufacturers.”
The other headline numbers in the ISM manufacturing forecast were a 10.3 percent expansion in capital expenditures and a 1.5 percent increase in employment for the balance of the year. With the exception of jobs, the latest report shows greater confidence among manufacturers in revenue, capex, and supply-price expectations when compared with the association’s December outlook, when survey respondents predicted 4.4 percent higher revenues, 8 percent greater capital spending, and 2.4 percent employment growth for 2014.
As U.S. labor productivity remains high, manufacturers will focus their spending on fixed assets. “I see purse strings opening up as there is more business confidence, [and] as we’re not hearing about budget wrangling and sequestration anymore,” Holcomb said. “There’s going to be a catch-up after the past few years of [spending] tightness.”
The capital investments will be put into efforts to raise production capacity, although survey respondents scaled back their average capacity growth forecast to 4.8 percent from 6.3 percent in December. A large group of respondents (48 percent) expects no changes in capacity for this year, while 44 percent expect an average capacity increase of 12.7 percent and 8 percent of respondents expect an average 11 percent decrease in capacity. Manufacturers’ current average operating rate, or capacity utilization, is 82.3 percent, a 2-point increase from December.
Holcomb adds that it will be important for manufacturers to keep their energy costs down, while “confusion around healthcare laws and what they mean to companies will take some time to shake out.” But he said that barring unforeseen large-scale events, business conditions are on solid footing. “We’re due for good times.”
Trade Gap Closes, Reversing Recent Slide
The U.S. monthly trade gap in March shrank by 3.6 percent to $40.4 billion as exports rebounded and outpaced import growth. The measure was in line with economists’ forecasts but was slightly wider than the Commerce Department’s initial March estimate, and the federal government is expected to revise first-quarter GDP from 0.1 percent growth to a 0.5 to 0.1 percent contraction, as a result.
The trade deficit closed from February’s downwardly revised $41.9 billion. Total March exports of $193.9 billion represented a 2 percent increase from February’s revised figure of $190 billion, and monthly imports of $234.3 billion were $2.5 billion more than the prior month. Exports were aided by boosts in foreign demand for capital goods, industrial supplies and materials, and automobiles and vehicle components.
Higher imports of consumer goods and food, meanwhile, reflected greater U.S. consumer confidence, even as American demand for foreign cars remained the same as in February. The increase in capital goods imports was a sign of U.S. firms raising their business spending in recent weeks.
Trade has been a drag on U.S. economic growth in recent months, as exports plummeted last December and struggled to regain hold in the early part of the year. However, March’s exports figure was the highest since November and the latest sign among many that the U.S. economy had begun to accelerate by the end of the first quarter.
“Exports rebounded after a few weaker months. Imports were also up, and that’s a good sign because it suggests that business and consumer spending are back on track,” said IHS Global Insight economist Paul Edelstein in a Bloomberg report. “In general, this is a pretty good report.”
“The strong finish to the last quarter points to further improvement in the trade balance in the coming months if this positive momentum is sustained,” Millan Mulraine, deputy chief economist at TD Securities, commented to Reuters. The trade deficit for the first quarter was slightly smaller than 2013 on a year-over-year basis, also helped by continued robust energy exports as well as foreign sales of industrial machinery.
The U.S. monthly trade disparity with China further closed in March from $20.9 billion to $20.4 billion. The year-to-date gap with the world’s second-biggest economy is running virtually the same as last year.
The nation’s trade deficits with the European Union, Japan, Germany, Mexico, Canada, and India all widened in March.
Spending Rise Excites Leasing, Finance Execs
The equipment leasing and financing industry remained buoyant about business conditions and the economy in April amid other economic indicators pointing to accelerations in capital investments and business spending.
The April Monthly Confidence Index by the Equipment Leasing & Finance Foundation (MCI-EFI) remained unchanged from March, at 65.1, but the number of lending executives who expect business conditions to improve over the next four months jumped from 31.4 percent to 37 percent. The proportion of respondents from banks, financial services companies, and independent leasing and finance companies who believe demand for leases and loans to fund capital expenditures will grow over the same period similarly rose from 31.4 percent to 37 percent.
Leasing and finance executives expressed growing confidence in the U.S. economy as both consumer spending and business purchasing activity are ramping up after a sluggish first quarter that was encumbered by winter weather. The April survey shows a 2.9 percent rise among respondents who believe that economic conditions will get better over the next six months.
“I believe there are many projects that were put on hold during the last quarter due to the difficult weather conditions this winter,” said Valerie Hayes Jester, president of Brandywine Capital Associates. “Equipment acquisition should improve as these projects get back on track, as economic conditions continue to improve and the weather turns more favorable.”
Some others, however, expressed caution. This was reflected by a 2.9 percent hike among executives who think economic conditions will worsen over the next six months compared with 0 percent in March.
Paul Menzel, president and CEO of Financial Pacific Leasing, said that while the economy has shown improvement, it remains susceptible to a global event, which “could stall our cyclical recovery.”
Michael Romanowski, president of Farm Credit Leasing Services, added, “Drought in some areas of the country may curtail capital investment this year.”
The majority of leasing and finance industry leaders view the economy as in “fair” shape, at 91.4 percent, though the number of executives who rated it as “poor” nearly doubled those who said it was “excellent.”
China’s Manufacturing Slump Continues
China’s manufacturing sector continued to shrink for a fourth straight month, according to the HSBC China Manufacturing PMI. By posting a 48.1 reading in April, Chinese manufacturers fell under the 50 rating separating expansion from contraction, though the month’s performance was a marginal improvement over March’s 48.0 rating. According to a Bloomberg report, the PMI finished below analysts’ expectations of 48.4 for the month.
Production at Chinese manufacturing facilities fell for the third successive month, which was attributed to markedly fewer new orders, according to HSBC. The decline came primarily from weak domestic demand, as new export orders “declined only slightly.”
“The latest data implied that domestic demand contracted at a slower pace but remained sluggish,” said Hongbin Qu, HSBC’s chief economist for China and co-head of Asian economic research. “[T]he manufacturing sector, and the broader economy as a whole, continues to lose momentum.”
As factory output dropped, albeit at a decelerated rate compared with March, Chinese goods producers reduced their staffing levels for the sixth straight month and at a deeper rate versus the previous month. They were able to, however, deplete their stocks of supplies and order backlogs, the HSBC report notes.
China’s manufacturing slowdown has been a reflection of deteriorating economic growth in the country. In trying to stimulate domestic growth, the Chinese government continues to raise infrastructure investment around the country and ease access to financing while providing other types of incentives for exporting companies.
HSBC economist Qu noted, “Beijing has introduced more reform measures, which could support growth by inducing more private-sector investment. We think bolder actions will be required to ensure the economy regains its momentum.”
While the central government’s GDP forecast is 7.5 percent growth for this year, economists are expecting a still-robust 7.3 percent GDP expansion for the world’s second-largest economy.