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Manufacturing in 2014: Full Steam Ahead

10 December 2013

The momentum gathered by the U.S. manufacturing sector in the second half of the year is expected to continue through early 2014, executives tell the Institute of Supply Management. In fact, the second half of 2014 will outshine the first six months, according to the ISM's Semiannual Economic Forecast, released Tuesday (Dec. 10).

Overall manufacturing revenue in 2014 is expected to exceed 2013 by 4.4 percent, said Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee. "Manufacturing purchasing and supply executives expect to see continued growth in 2014. They are optimistic about their overall business prospects for the first half of 2014, and are even more optimistic about the second half of 2014," said Holcomb.

Although 2014 revenue expectations lag 2013's increase of 4.6 percent, Holcomb points to the industry's progress since 2012. "Manufacturing experienced six consecutive months of growth from June through November 2013, while experiencing only one month of contraction during the entire first 11 months of 2013," Holcomb said. In May, the ISM's leading index—the PMI—registered 49 percent and has been increasing since. An index above 50 percent generally indicates growth; a rate less than 50 percent represents contraction.

Capital expenditures, a major driver in the U.S. economy, are expected to increase by 8 percent over 2013, according to the ISM; and actual expenditures for the second half of 2013 will come in above earlier expectations. For 2013, capital expenditures increased 12.3 percent on average when compared to 2012 levels. Survey respondents' previous expectations in April called for 9.1 percent growth. "The CFOs in the industry control the purse strings," said Holcomb, "and they have to review every proposal that comes across their desks. When times are tough, they keep the purse strings tight. What we have seen is a positive trend in terms of loosening the purse strings, and they are allowing things to go forward. This reflects confidence in the direction of the economy."

The manufacturing sector also expects that its employment base will grow by 2.4 percent, while non-manufacturing expects employment growth of 2.1 percent.

The report was not without concerns, however: Survey respondents said the most challenging problems facing their businesses as they plan for 2013 are: domestic sales growth (32 percent); international sales growth (18 percent); healthcare reform uncertainty (14.6 percent); ongoing government shutdown and debt ceiling concerns (13.5 percent); government regulations (9.6 percent); healthcare costs (8.4 percent); inflation (3.4 percent); and taxes (0.6 percent). The panel also predicts the prices they pay for raw materials will increase 1.2 percent during the first four months of 2014, and will increase an additional 0.4 percent during the balance of the year, with an overall increase of 1.6 percent for 2014. This compares to a reported 0.9 percent increase in raw materials prices for 2013 compared with 2012.

Additional highlight from the ISM report include:

Respondents report operating at 80.3 percent of their normal capacity, up very slightly from 80.2 percent reported in April 2013.

Survey respondents forecast that they will increase inventories by 0.9 percent to support their planned level of sales in 2014.

Manufacturers have an expectation that employment in the sector will increase by 2.4 percent in 2014, while labor and benefit costs are expected to increase an average of 2.3 percent.

Manufacturing purchasers are predicting growth in exports and imports in 2014. Respondents also expect the U.S. dollar to strengthen on average against the currencies of major trading partners.

The panel also indicated that supply chain management practices will be improved in 2014 using the following strategies, listed in order: strategic sourcing/supply base rationalization; process and information systems improvements; supplier relationship management; inventory management and control; and improved cross-functional planning and scheduling.

The full report can be viewed here.

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