ISM: Semiannual economic report cites strong economic output through rest of 2011

With both the Institute for Supply Management’s (ISM) Manufacturing Report on Business and Non-Manufacturing Report on Business showing strong growth for 23 and 17 months, respectively, it was not surprising that the ISM’s Semiannual Economic Forecast point to continued economic growth throughout the rest of the year.

The report, which was released this week, is based on feedback from U.S.-based purchasing and supply executives.

For manufacturing side, the report said that manufacturing revenues are expected to increase 7.5 percent in 2011, with capital investment heading up 17.9 percent, and capacity utilization up 83.2 percent.

Other notable manufacturing metrics gleaned from the report included: prices are expected to increase 7.4 percent for all of 2011 and an expected 1.3 percent for the remainder of the year; production capacity is predicted to rise by 8.1 percent, and manufacturing employment is slated to rise 2.9 percent through the end of 2011.

“The story continues with manufacturing in the form of continued growth and four months of 60-plus PMI [the index used by the ISM to measure the manufacturing sector; an index over 50 indicates growth is occurring],” said Norbert J. Ore, CPSM, C.P.M., chair of the ISM Manufacturing Business Survey Committee, in an interview. “This forecast solidifies how manufacturing is doing well and should continue to see significant growth for the balance of the year. I am not sure it will be as great as the growth we have seen in the first four months of the year, but that is a level that is very difficult to maintain.”

Ore said the predicted 8.1 percent gain in production capacity indicates that manufacturers are willing to expand and do some things that are positive through productivity gains, with the operating rate moving from 72.8 percent in April 2010 to 83.2 percent today, which Ore described as a very large jump.

The ISM’s 83.2 operating rate is equivalent to the Federal Government’s 75 percent reading, said Ore. Other encouraging signs include projected increases in capital expenditures, which he said reflects confidence in the business sector and gains in overall growth through capital expenditures.

The primary negative aspect in the manufacturing sector is directly related to pricing pressure, according to Ore, as sellers have a lot of pricing power in tandem with high operating levels and sufficient demand.

On the non-manufacturing side, revenues are projected to increase 2.1 percent in 2011, with capital investment and capacity utilization pegged at 1.4 percent and 83.7 percent, respectively.

Non-manufacturing production capacity is slated to increase by 2 percent this year, and prices paid are expected to head up 4.7 percent in 2011, and employment is being forecasted at a 0.9 percent growth rate.

“Non-manufacturing is a bit of a different picture,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “We are seeing slow growth and not some as big of increases as the manufacturing sector is. The operating rate from last year has been steady, and that goes back to it being a very labor-intensive sector and doing more with less for such a long period of time as non-manufacturers supply managers and their companies are trying to do things as best as they could.”

While production capacity is only expecting a 2 percent gain, non-manufacturing capital expenditures pale in comparison to the huge upswing on the manufacturing side, which Nieves and Ore said is a business confidence issue, as non-manufacturing companies are keeping a close eye on their expenses.

Perhaps the most unsurprising aspect of the non-manufacturing outlook was the 0.9 percent prediction for employment. Nieves said it points to the theme of a jobless recovery in an industry that relies heavily on labor, and he said it has been an anchor on non-manufacturing growth, too.