The business outlook among manufacturers has improved as the year has progressed, a positive sign for the industrial recovery, according to a new report. Results from the third quarter of 2009 indicate that conditions in the industrial sector are expected to continue improving over the next 12 months, despite lingering instability in some areas of business activity.

According to the NAM/IndustryWeek Manufacturing Index — 3rd Quarter 2009, published by the National Association of Manufacturers and IndustryWeek, 70 percent of manufacturers felt optimistic about the future at the start of the economic recession in 2007, but confidence dropped to a low of 28 percent by Q1 2009.

With the economic recovery underway, optimism has since rebounded, with 55 percent of survey respondents reporting a positive outlook in the third quarter of the year, the highest level in six quarters.

The biggest gain was in the percentage of respondents who claimed the business outlook is "somewhat positive," which rose from 25 percent in the first quarter to 49 percent in the third, while those who have a "very positive" outlook climbed from 3 percent to 5 percent. Those who said conditions are "somewhat negative" fell from 43 percent to 35 percent and those who cited "very negative" dropped from 29 percent to 10 percent of the total.

Based on a poll of 403 NAM members, the survey also found that, despite improving confidence, 65 percent of respondents believe the downturn in their company's production would extend into 2010, while 16 percent believe production has already begun to rebound. Seven percent expect the downturn to end in the fourth quarter of 2009 and 5 percent stated that production levels have remained healthy.

The forecast echos the PricewaterhouseCoopers LLP Manufacturing Barometer released in August, which reported that 63 percent of manufacturing executives believed the U.S. economy was still weakening, but the overall perspective for the majority of respondents was optimistic through the second quarter of 2010, with pessimism on the decline.

Last month, U.S. industrial output posted its first quarterly increase since early 2008, while the manufacturing sector posted its third consecutive month of production gains, helping drive the largest single-quarter improvement in industrial production since Q1 2005.

In their forecast for the next 12 months, respondents to the NAM/IndustryWeek survey said they expect sales to increase by an average of 1.6 percent, the first positive prediction in a year. The projected upturn is expected to be modest, with most respondents citing "somewhat positive" expectations and very few reporting "very positive" expectations.

The Manufacturers Alliance/MAPI Survey on the Business Outlook in September showed similar results: the annual orders index, which is based on expected orders for 2010 compared to new orders in 2009, rose to 66 percent.

The NAM/IndustryWeek report found that respondents expect their product prices to increase 0.4 percent over the next year, an improvement over the previous two consecutive quarters of expected deflation, while capital spending was forecast to rise by 0.2 percent over the same period. Manufacturers also plan to continue cutting inventory levels, predicting an overall decrease of 1.5 percent in stockpiles over the next year.

With continued instability in the job market and rising concerns over a jobless recovery, survey respondents expect employment conditions to remain largely unchanged for the next 12 months, with a hiring increase of only 0.1 percent. For similar reasons, wage growth is expected to decline by 0.3 percent in the next 12 months.

Optimism appears to be on the rise, and manufacturers have more positive expectations for business conditions in the future, but the majority perspective is that the recovery will be slow and gradual.

Earlier

Industrial Output Makes Largest Quarterly Gain in Four Years

Manufacturers' Pessimism over Economy Declines

U.S. Employment Prospects Remain Mixed

Weekly Industry Crib Sheet: Administration Focuses on Aiding Small Businesses

Resources

The NAM/IndustryWeek Manufacturing Index — 3rd Quarter 2009
by David Huether
National Association of Manufacturers and IndustryWeek, 2009

The NAM/IndustryWeek Manufacturing Index — 1st Quarter 2009
by David Huether
National Association of Manufacturers and IndustryWeek, 2009

Manufacturing Barometer: Business Outlook Report, Second Quarter 2009
PricewaterhouseCoopers LLP, Aug. 7, 2009

MAPI Survey on the Business Outlook: Improvement on Horizon for Industrial Sector
Manufacturers Alliance/MAPI, Oct. 15, 2009