The NAM/IndustryWeek Manufacturing Index -- 4th Quarter 2008
Confidence Among Manufacturers Sinks to Record Low Levels
Most companies surveyed in the NAM/IndustryWeek Manufacturing Index believe downturn in production will last at least until second half of 2009.
By David Huether, Chief Economist, National Association of Manufacturers
Following three consecutive quarterly declines, confidence among small manufacturers (those that employ less than 1,000 workers) plummeted in the fourth quarter of 2008 to the lowest level in the 11-year history of the survey, with just 39% of small manufacturers having a positive business outlook, according to the NAM/IndustryWeek fourth quarter survey. This is down sharply from the 61% that had a positive business outlook in the third quarter and surpassed the previous low of 53% registered in the third quarter of 2001.
Meanwhile, just 28% of large companies responding to the fourth quarter survey had a positive business outlook, a slight increase from the record low of 21% registered in the third quarter.
For both large and small survey respondents, the 12-month outlook for sales, pricing power, investment, inventories, employment and wage growth all fell to their lowest levels on record.
Results of the fourth quarter survey are based on responses of 362 members of the National Association of Manufacturers (NAM). Large 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:
- From your company's perspective, how long will a downturn in production last?
The majority of both large (79%) and small (60%) survey respondents expect a downturn in their company's production will last at least into the second half of 2009.
For large firms, 3% expect production declines to last into the first half of 2009, 21% expect production declines to last into the second half of 2007 and 59% expect production declines will extend into 2010. Meanwhile, 14% are experiencing a slowdown in production, but not a downturn, while just 3% expect growth to remain healthy.
For small firms, 13% expect production declines to last into the first half of 2009, 27% expect production declines to last into the second half of 2007 and 33% expect production declines will extend into 2010. Meanwhile, 21% expect a production slowdown, while just 6% expect growth to remain healthy.
The Business Outlook. 39% of small and just 28% of large manufacturing companies who responded to the fourth quarter survey had a positive business outlook for their company.
For small respondents, the drop in optimism from the 61% of survey respondents who were optimistic in the third quarter to 39% in the fourth quarter marked the largest quarterly drop in optimism in the history of the index, double the next-largest decline that took place in the first quarter of 2001. Marking the fourth consecutive quarterly decline, the level of optimism in the fourth quarter was the lowest level on record.
| |
Very
Positive |
Somewhat
Positive |
Somewhat
Negative |
Very
Negative |
| Large Company Respondents |
0% |
28% |
34% |
38% |
| Small Company Respondents |
4% |
35% |
42% |
19% |
After tumbling 58 percentage points over the previous five quarters, the share of large companies who were optimistic about their business outlook edged up seven percentage points from 21% in the third quarter to 28% in the fourth quarter. Still, the current level of optimism for large companies remains 14 percentage points below the low of 42% registered during the 2001 recession.
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% 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 six quarters, the business outlook worsened at a quicker pace, initially for large companies but more recently for both large and small firms. This has coincided with a dramatic downturn manufacturing production. During the 12 months ending in December manufacturing production fell by 10%, the largest yearly decline since 1975.
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) |
2008 (q4) |
| Large |
78% |
66% |
88% |
78% |
80% |
63% |
59% |
57% |
38% |
21% |
28% |
| Small |
81% |
64% |
85% |
77% |
79% |
76% |
80% |
70% |
67% |
61% |
39% |
Sales Expectations. Looking ahead 12 months both large and small company respondents expect sales to decrease. This is the first time in the 11 year history of the survey that both large and small manufacturers expect their sales to decline.
Marking an exacerbation of a slowing trend that started in the second quarter of 2008, small firms expect their sales to decrease 3%. This is the first time in the history of the survey that small companies expected sales to decrease in the coming 12 months.
After expecting a 1.3% decline in the third quarter, large firms expect their sales to decline by 5.1% over the next 12 months; this is a new low (the prior quarter was the previous low) for sales expectations for large firms.
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) |
2008 (q4) |
| Large |
4.8 |
2.7 |
4.9 |
4.0 |
4.5 |
2.8 |
2.1 |
0.9 |
-0.7 |
-1.3 |
-5.1 |
| Small |
4.0 |
2.4 |
4.6 |
4.3 |
3.9 |
3.1 |
3.0 |
3.0 |
2.5 |
1.5 |
-3.0 |
Pricing Expectations. Both large and small manufacturers expect their pricing power to contract over the coming 12 months. This marks the continuation of a trend that started in the third quarter. As recent as the second quarter of 2008, both large and small survey respondents expected the pricing power to exceed 3% over the coming year.
Large firms expect their prices to decrease by 0.8%, while small firms expect their pricing power to rise edged down 0.1% over the next 12 months.
Beginning in 2004, manufacturing pricing power accelerated compared to the 1998-2003 period, when pricing power for both large and small manufacturers was typically less than 1%. The current decline in pricing power expectations 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) |
2008 (q4) |
| Large |
0.5 |
0.3 |
1.7 |
1.1 |
2.0 |
1.5 |
1.7 |
2.3 |
3.2 |
1.0 |
-0.8 |
| Small |
1.1 |
0.7 |
2.1 |
1.6 |
1.9 |
1.8 |
2.0 |
2.6 |
3.3 |
2.3 |
-0.1 |
Investment Expectations. Looking ahead 12 months, large manufacturers expect their capital expenditures to decline by 4.2%. This marks the fourth consecutive expectation of negative investment growth going forward, and the most negative expectation in the history of the survey.
Small survey respondents expect their capital investment to fall by 2% over the next 12 months. While this decrease in anticipated investment expenditures is not as severe as that of large survey respondents, it is nonetheless the first time in the history of the survey that small companies expected to reduce capital expenditures over the coming year.
These trends are consistent with a slowdown in overall business investment spending that has taken place over the past year and a half. The fourth quarter survey suggests that investment spending by manufacturers will remain 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) |
2008 (q4) |
| Large |
1.5 |
0.9 |
3.1 |
2.3 |
2.3 |
0.3 |
1.9 |
-0.1 |
-1.5 |
-1.4 |
-4.2 |
| Small |
2.4 |
0.8 |
2.5 |
2.3 |
2.2 |
1.6 |
1.7 |
2.1 |
1.5 |
0.4 |
-2.0 |
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 5.8%, while small companies expect to reduce inventories by 3.3% over the coming year. For both large and small companies, the fourth quarter survey results marked the largest expected inventory declines in the history of the survey.
The need to reduce inventories is largely being driven by the fact that since last July, inventory levels have not adjusted adequately to the drastic downturn in shipments, according to Commerce Department statistics. As a result, the inventory/sales ratio in manufacturing surged from a relatively low level to a seven-year high in the span of just four months (August-November).
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) |
2008 (q4) |
| Large |
-1.5 |
-1.8 |
-1.0 |
-1.3 |
-1.7 |
-1.9 |
-2.2 |
-2.2 |
-3.3 |
-2.5 |
-5.8 |
| Small |
0.2 |
-0.8 |
0.1 |
-0.5 |
-0.6 |
-0.6 |
-0.4 |
-0.7 |
-0.5 |
-1.3 |
-3.3 |
Employment Expectations. Small respondents to the four quarter survey expect to decrease employment by 2.2% over the next 12 months. This is the first anticipated employment decline by small survey respondents in the history of the survey. Prior to the fourth quarter, the lowest expectation was of a 0.3% rise, which took place in the third quarters of 2001, 2003 and 2008.
Meanwhile, large firms expect employment to decline by 4.6%, the fifth consecutive quarterly decline and the steepest decline in the history of the survey. Prior to the fourth quarter, the largest expected employment decline was the 3% decline expected during the second quarter of 2008.
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) |
2008 (q4) |
| Large |
0.8 |
-0.5 |
0.7 |
0.5 |
0.3 |
0.4 |
-0.1 |
-0.6 |
-3.0 |
-2.2 |
-4.6 |
| Small |
2.1 |
0.8 |
1.8 |
1.3 |
1.7 |
1.6 |
1.2 |
0.9 |
0.9 |
0.3 |
-2.2 |
Wage Expectations. Large survey respondents expect wages to increase by just 0.5% over the coming 12 months. For smaller companies, wages are expected to grow by a similar 0.6%. For both large and small survey respondents, this is the slowest expectation of wage growth in the history of the survey. By comparison, the prior average wage expectation was 2.5% for large firms and 2.3% for smaller firms.
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) |
2008 (q4) |
| Large |
3.1 |
2.2 |
2.5 |
2.0 |
1.9 |
1.9 |
1.6 |
2.0 |
1.1 |
1.7 |
0.5 |
| Small |
2.9 |
2.0 |
2.2 |
2.0 |
2.3 |
2.2 |
2.1 |
2.1 |
2.3 |
1.8 |
0.6 |
All charts developed by the National Association of Manufacturers (NAM).
See Also:
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