ISM semiannual report expects more continued economic growth for rest of 2012

Looking ahead to the balance of 2012, new data from the Institute for Supply Management (ISM) indicates growth will remain intact.

In its 2012 Semiannual Economic Forecast, which is based on feedback from U.S.-based purchasing and supply chain executives, manufacturing and non-manufacturing sectors are expected to leverage the solid levels for various metrics each has been seeing over the last several months.

On the manufacturing side, the report said it expects manufacturing revenue to increase 4.5 percent, with capital investment increasing 6.2 percent and capacity utilization at 81.6 percent.

Other manufacturing-related metrics cited in the report included: prices paid increased 1.9 percent through the end of April 2012; production capacity is expected to increase 5.2 percent in 2012; prices are expected to increase a total of 2.3 percent for all of 2012; and employment is expected to increase 1.4 percent over the remainder of the year.

“The PMI (ISM’s index to measure manufacturing output) has been growing for 33 consecutive months, and if look at the first four months of 2012 there is a nice continuation with less volatility than we had last year,” said Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, in an interview. “This forecast essentially says we are going to continue to see growth at a moderate level in 2012.”

The expected manufacturing revenue increase of 4.5 percent, coupled with a 2.3 percent increase in the cost of raw materials, suggests that manufacturers’ margins are going to open up and be healthy and also open the well for capital expenditures,” added Holcomb.

Capital expenditures for manufacturing are expected to increase 6.2 percent in 2012. Holcomb said that 2011 capital expenditures were up 11 percent over 2010, which he said was a huge year. But with manufacturing companies seeing solid growth, Holcomb said it is likely CFOs will open up the purse strings through the rest of 2012 to invest in things like facilities and equipment to improve productivity going forward.

For non-manufacturing, the report expects revenue to increase 4.8 percent, with capital investment expected to rise 3.6 percent. Non-manufacturing capacity utilization is expected to be at 85.2 percent.

Non-manufacturing production capacity is expected to increase by 3.3 percent, and prices paid increased by 1.8 percent through April 2012. Non-manufacturing employment is expected to increase by 1.9 percent throughout the rest of 2012. Capital expenditures are projected to increase by 3.6 percent, which has been at 2 percent or lower over the last three years.

“We are seeing nice gains in non-manufacturing,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “The first quarter performance has helped build up the confidence level in non-manufacturing for things like capital reinvestment. This is really saying a lot for this sector, which is eclectic and does not have the plants and equipment that you see in manufacturing.”

Addressing capacity utilization—at 81.6 percent for manufacturing and 85.2 percent for non-manufacturing—both Holcomb and Nieves said these levels are healthy.

But when manufacturing capacity gets into the 85-to-87 percent range, Holcomb said there is a tendency for things to get tight, and at the current capacity level he explained there is still room for flexibility and growth at a historically sound level.

Nieves said non-manufacturing companies have gone through a correction from when there was a lot of overhead, with companies now doing more with less over a period of time.

“The bright spot here is that with revenues going where they are going while the employment index has been lagging during this high capacity utilization, companies eventually have to create some jobs down the road,” Nieves said. “Like manufacturing, it is slow and steady growth…and we are at a sustainable level right now.”

Looking ahead to later in the year, Holcomb said moderate growth with less volatility can reasonably be expected and viewed as good news, as things are more sustainable and steady compared to previous periods in the past.

And Nieves said that one of the bright spots in non-manufacturing has been cost containment—in spite of strong fuel prices and demand for petroleum-based products—has been and remains in place in non-manufacturing. And on the sales side of things, prices need to be within reach for consumers so they don’t curtail current spending levels.