The NAM/IndustryWeek Manufacturing Index -- 3rd Quarter 2008
Half
of All Manufacturers Expect a Recession in the Next Year
NAM/IndustryWeek
Manufacturing Index also indicates significant slowing in employment and wage
trends in 2009.
By David Huether, Chief Economist, National Association of Manufacturers
Confidence among large manufacturers eroded for a fifth consecutive quarter in the third quarter of 2008. Just 21% of large companies responding to the NAM/IndustryWeek third quarter survey had a positive business outlook. This marks the lowest confidence level in the history of the survey going back to the fourth quarter of 1997, with sales, investment and employment expectations also falling to their lowest levels on record. For small manufacturers, the business outlook moderated for a third consecutive quarter to its lowest level since the fourth quarter of 2002, but it remained significantly elevated compared to large survey respondents.
Results of the third quarter survey are based on responses of 327 NAM member companies. Large (those employing more than 1,000 workers) and small companies recorded their business outlook as well as their 12-month expectation on sales, prices, capital investment, inventories, employment and wages. In addition, companies were asked about the prospects for a recession in 2008 and the impacts of tightening credit standards on their company's investment plans.
Recession Expectations. Asked if the U.S. economy would go through a recession in 2008, nearly half (49%) answered "yes." This is more than the 37% of survey respondents who expected a recession in the second quarter survey. Just 14% answered "no," and 38% answered "maybe."
What respondents are saying:
- "All of 2009 and first half of 2010."
- "Because of the downturn in auto sales and housing we've experienced a 25% reduction in our backlog."
-
"There is a good chance that manufacturing will be spared the worst of it."
-
"Incoming orders are way down since August."
-
"It will if the U.S. implements protectionist trade policies that other nations retaliate against."
-
"We are already in a recession and worsening."
-
"Depends on the ultimate solution to the current credit"
Are tightening lending standards limiting your company's access to capital needed to finance domestic investment expenditures? Nearly a fifth (18%) of survey respondents reported that tightening lending standards are already limiting their firm's access to capital used to finance investment expenditures.
What respondents are saying:
- "Talking to more banks and alternate financing sources."
- "Our capital improvements are based off of profits and cash, not borrowing."
- "My biggest concern with tightening credit is the collection of accounts receivable."
- "Hasn't had a negative impact yet, but we're not counting it out."
- "Our bank terminated all of our loans and we almost could not find another bank who was taking new customers."
- "We just had our bank not renew our line of credit even though we had not used it in over one year."
- "Will find out in the next six months."
- "We have great credit and we bank with small, home town bankers who know us."
The Business Outlook. 61% of small and just 21% of large manufacturing companies who responded to the third quarter survey had a positive business outlook for their company.
For small respondents, the 6% drop in optimism (from the 67% of survey respondents in the second quarter of 2008 to 61% in the third quarter) marked the fifth decline in the past seven quarters. The level of optimism in the third quarter was the lowest level since the fourth quarter of 2001.
After tumbling 42 percentage points over the previous four quarters, the share of large companies who were optimistic about their business outlook dropped another 17 percentage points in the third quarter to a level of just 21%.
While the level of optimism for small survey respondents remained higher in the third quarter of 2008 compared to 2001, large companies' optimism is now at an all-time low.
The confidence level of manufacturers has gone through three periods since the survey began in late 1997. In the tail end of the 1990s expansion, the percent of survey respondents with a positive outlook averaged around 80%. During the 2001-2003 period (the recession and slow initial recovery), confidence fell significantly. It was not until the 2004-2006 period of time, when the manufacturing recovery picked up significant momentum, that confidence levels increased.
From the second quarter of 2006 to the second quarter of 2007, the business outlook for both large and small manufacturers moderated at a gradual pace. Over the most recent four quarters, the business outlook worsened at a quicker pace, especially for large companies. This has coincided with a slowdown in manufacturing production. During the 12 months ending in September 2008, manufacturing production fell by 4.8%, the largest 12-month decline since 2001.
Business Outlook
(Percentage of firms With a positive business outlook)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(q1) |
2007
(q2) |
2007
(q3) |
2007
(q4) |
2008
(q1) |
2008
(q2) |
2008
(q3) |
| Large |
78% |
66% |
88% |
78% |
80% |
63% |
59% |
57% |
38% |
21% |
| Small |
81% |
64% |
85% |
77% |
79% |
76% |
80% |
70% |
67% |
61% |
Sales Expectations. Looking ahead 12 months, small manufacturers expect their sales to continue to increase, but at a slower rate than earlier in the expansion, while large manufacturers expect their sales to decline.
Small firms expect their sales to increase by 1.5%, which is slower than the 2.5% pace in the second quarter and half the 3% pace expected during the first quarter.
After expecting an 0.7% decline in the second quarter, large firms expect their sales to decline by 1.3% over the next 12 months; this is the lowest sales expectation in the history of the survey.
Sales Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(q1) |
2007
(q2) |
2007
(q3) |
2007
(q4) |
2008
(q1) |
2008
(q2) |
2008
(q3) |
| Large |
4.8 |
2.7 |
4.9 |
4.0 |
4.5 |
2.8 |
2.1 |
0.9 |
-0.7 |
-1.3 |
| Small |
4.0 |
2.4 |
4.6 |
4.3 |
3.9 |
3.1 |
3.0 |
3.0 |
2.5 |
1.5 |
Pricing Expectations. Both large and small manufacturers expect their pricing power to increase over the coming 12 months, but at a slower pace than earlier in the year. Large firms expect their prices to rise by 1%, and small firms expect their pricing power to rise 2.3% over the next 12 months. For both large and small companies, this is a noticeable deceleration from the first two quarters of the year.
Since 2004, manufacturing pricing power has accelerated compared to the 1998-2003 period, when pricing power for both large and small manufacturers was typically less than 1%.
More sluggish pricing power is likely a consequence of slower demand as well as a reduction in energy prices and related transportation costs.
Price Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(q1) |
2007
(q2) |
2007
(q3) |
2007
(q4) |
2008
(q1) |
2008
(q2) |
2008
(q3) |
| Large |
0.5 |
0.3 |
1.7 |
1.1 |
2.0 |
1.5 |
1.7 |
2.3 |
3.2 |
1.0 |
| Small |
1.1 |
0.7 |
2.1 |
1.6 |
1.9 |
1.8 |
2.0 |
2.6 |
3.3 |
2.3 |
Investment Expectations. Looking ahead 12 months, large manufacturers expect their capital expenditures to decline by 1.3%. This marks the third consecutive expectation of negative investment growth going forward, though more moderate than the 1.5% decline registered in the second quarter.
Small survey respondents expect their capital investment to increase by just 0.4% over the next 12 months. This is the slowest expectation since the second quarter of 2002, when the expectation was an 0.3% rise over the next 12 months.
These trends are consistent with a slowdown in overall business investment spending that has taken place over the past year and a half. The third quarter survey suggests that investment spending by manufacturers will turn negative over the next several quarters.
Investment Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(q1) |
2007
(q2) |
2007
(q3) |
2007
(q4) |
2008
(q1) |
2008
(q2) |
2008
(q3) |
| Large |
1.5 |
0.9 |
3.1 |
2.3 |
2.3 |
0.3 |
1.9 |
-0.1 |
-1.5 |
-1.4 |
| Small |
2.4 |
0.8 |
2.5 |
2.3 |
2.2 |
1.6 |
1.7 |
2.1 |
1.5 |
0.4 |
Inventory Expecations. Both large and small survey respondents expect to reduce inventory levels over the next 12 months. Large firms expect to reduce inventories by 2.5% (the second biggest drop since the second quarter of 1999), while small companies expect to reduce inventories by 1.3% over the coming year (the largest decline in seven years.)
The continued desire to reduce inventories is likely being driven by two forces. One is the fact that demand going forward is expected to moderate, especially for large survey respondents. The other force is that the nationwide inventory-to-sales ratio for overall manufacturing reached a six-year high in the third quarter. A continuing effort to bring inventory levels back down to their 2004-2006 levels is prompting firms to reduce inventory investment going forward.
Inventory Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(q1) |
2007
(q2) |
2007
(q3) |
2007
(q4) |
2008
(q1) |
2008
(q2) |
2008
(q3) |
| Large |
-1.5 |
-1.8 |
-1.0 |
-1.3 |
-1.7 |
-1.9 |
-2.2 |
-2.2 |
-3.3 |
-2.5 |
| Small |
0.2 |
-0.8 |
0.1 |
-0.5 |
-0.6 |
-0.6 |
-0.4 |
-0.7 |
-0.5 |
-1.3 |
Employment Expectations. Respondents from small manufacturers to the third quarter survey expect to increase employment by 0.3% over the next 12 months. This is the slowest increase anticipated since the first quarter of 2003 and a significant deceleration from the 0.9% increases expected during the first two quarters of the year.
Meanwhile, large firms expect employment to decline by 2.2%. While this is a smaller decline than the 3% decline recorded in the second quarter, it still marks the fourth consecutive quarterly decline in the employment expectations of larger firms. The last time there were four consecutive quarterly declines in employment expectations by large firms was during the 2001-2002 period.
Employment Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(q1) |
2007
(q2) |
2007
(q3) |
2007
(q4) |
2008
(q1) |
2008
(q2) |
2008
(q3) |
| Large |
0.8 |
-0.5 |
0.7 |
0.5 |
0.3 |
0.4 |
-0.1 |
-0.6 |
-3.0 |
-2.2 |
| Small |
2.1 |
0.8 |
1.8 |
1.3 |
1.7 |
1.6 |
1.2 |
0.9 |
0.9 |
0.3 |
Wage Expectations. Large survey respondents expect wages to increase by 1.7% over the coming 12 months. While an acceleration from the second quarter survey when wages were expected to increase by just 1.1%, wage growth is expected to grow at a more moderate pace than earlier in the expansion. For smaller companies, wages are expected to grow by a similar 1.8%, which is the slowest pace in five years.
Wage Outlook
(12-Month Percent Change Expectation)
| |
1998-
2000 |
2001-
2003 |
2004-
2006 |
2007
(q1) |
2007
(q2) |
2007
(q3) |
2007
(q4) |
2008
(q1) |
2008
(q2) |
2008
(q3) |
| Large |
3.1 |
2.2 |
2.5 |
2.0 |
1.9 |
1.9 |
1.6 |
2.0 |
1.1 |
1.7 |
| Small |
2.9 |
2.0 |
2.2 |
2.0 |
2.3 |
2.2 |
2.1 |
2.1 |
2.3 |
1.8 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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