Manufacturing Growth Continues; 2010 Outlook Positive

Manufacturing expanded for a fifth straight month in December, with continued growth projected for 2010, says the Institute for Supply Management.

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Economic activity in the manufacturing sector expanded in December 2009 for the fifth consecutive month, and the overall economy grew for the eighth consecutive month, say the nation’s supply executives in the latest Manufacturing ISM “Report On Business,” issued on Jan. 11 by the Institute for Supply Management (ISM,

The report on December manufacturing expansion comes on the heels of a semiannual ISM forecast released on Dec. 8, 2009, that projects a positive scenario for manufacturing in 2010. In that report, the ISM said that 60 percent of survey respondents expect revenues to be greater in 2010 than in 2009. The panel of purchasing and supply executives expects a 5.7 percent net increase in overall revenues for 2010, compared to a 10.7 percent decrease reported for 2009.  

Today’s report on December 2009 results revealed an increase in the ISM’s purchasing managers index (PMI) last month. “The manufacturing sector grew for the fifth consecutive month in December as the PMI rose to 55.9 percent, its highest reading since April 2006 when it registered 56 percent,” said Norbert J. Ore, chair of the ISM’s Manufacturing Business Survey Committee.

Inventory adjustments

“This month's report is quite strong as both the New Orders and Production Indexes are above 60 percent,” Ore continued. “The sector may be benefiting from an excessive destocking cycle as indicated by the recent performance of the Customers' Inventories Index. Customers' inventories have been 'too low' for nine consecutive months, and this month's index is the lowest reading since the inception of the index in January 1997. Overall, the recovery in manufacturing is continuing, but there are still some industries mired in the downturn as evidenced by the seven industries still in decline."

In December, nine of the 18 manufacturing industries reported growth. The industries—listed in order—are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Computer & Electronic Products; Machinery; Electrical Equipment, Appliances & Components; Transportation Equipment; Paper Products; Furniture & Related Products; and Food, Beverage & Tobacco Products.

The seven industries reporting contraction in December—listed in order —are: Wood Products; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Plastics & Rubber Products; Chemical Products; Printing & Related Support Activities; and Fabricated Metal Products.

Keep it growing

In its December 2009 Semiannual Economic Forecast issued last month, the ISM projects that economic growth in the United States will resume in 2010. Expectations for 2010 by are for the positive conditions experienced in the second half of 2009 to continue in manufacturing, while the non-manufacturing sector foresees marginal growth, according to the report, which surveyed the nation's purchasing and supply management executives.

The overall forecast projects optimism about the U.S. economy for 2010. The manufacturing sector overall is positive about prospects in 2010 with revenues expected to increase in 13 of 18 industries, while the non-manufacturing sector appears slightly less positive about the year ahead with 8 of 18 industries expecting higher revenues. Business investment, a major driver in the U.S. economy, will decline as both sectors expect a combined average of a 5.4 percent decline in capital spending.

The 13 manufacturing industries expecting improvement over 2009—listed in order—are: Transportation Equipment; Nonmetallic Mineral Products; Printing & Related Support Activities; Computer & Electronic Products; Paper Products; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Chemical Products; Machinery; Miscellaneous Manufacturing; Textile Mills; and Fabricated Metal Products.

Optimism returns

“Manufacturing purchasing and supply executives reflect more of their typical optimism about their organizations’ prospects as they consider the first half of 2010,and they are even more positive about the second half,” said Ore. “While 2009 has been a challenging year overall, we are in a growth trend as we approach the end of the year. Respondents expect cost pressures to be low to moderate based on their price forecast," he added.

In the manufacturing sector, respondents report operating at 70.1 percent of their normal capacity, up from 67 percent reported in April 2009. Purchasing and supply executives predict that capital expenditures will decrease by 4 percent in 2010, compared to a 7.8 percent decrease reported for 2009. Survey respondents also forecast that they will reduce inventories in an effort to improve their purchased inventory-to-sales ratio in 2010.

Manufacturers have an expectation that employment in the sector will increase by 1.5 percent, while labor and benefits costs are expected to increase an average of 1.4 percent in 2010. Manufacturing purchasers are predicting strength in exports and imports in 2010. They also expect the U.S. dollar to weaken on average against the currencies of major trading partners.

The panel also predicts the prices they pay will increase 0.2 percent during the first four months of 2010, and will increase an additional 2.4 percent during the balance of 2010, with an overall increase of 2.6 percent for 2010. Respondents' major concerns are: weak economy; credit crisis; taxes; interest rates; and high energy costs.
Survey respondents expect to realize supply chain improvements through supplier consolidation; new or improved enterprise technology and system utilization; improved inventory/asset management; Lean Manufacturing; and cost reduction.

Institute for Supply Management

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