ISM semiannual report presents a positive outlook for manufacturing and non-manufacturing in 2018

As was the case in its previous edition in May, the December release of the Institute for Supply Management’s (ISM) Semiannual Economic Forecast paints an optimistic picture for ongoing economic growth for both the manufacturing and non-manufacturing sectors as part of the recovery that kicked off in earnest in mid-2009.

Data for this report is based on feedback from U.S.-based purchasing and supply chain executives in manufacturing and non-manufacturing sectors.

On the manufacturing side, ISM expects revenue in the sector to increase by 5.1% in 2018, which is ahead of 2017’s estimate of 4.1%, with 70% of manufacturing respondents expecting 2018 revenue to be ahead of 2017 revenue and revenue expected to grow in 16 of the 20 manufacturing sectors.

2018 manufacturing capital expenditures are expected to be up 2.7%, which is below the 8.7% increase from 2016 to 201 and also below May’s estimate of 5.2% for 2017. The report said 2018 manufacturing capital expenditures are expected to head up 2.7%, below the 5.2% predicted in May, and capacity utilization at 85.8% topping May’s 82.5%.

Prices paid for raw materials by ISM manufacturing respondents are projected to go up 1.3% during the first four months of 2018, with the expectation of an additional 0.5% increase over the balance of the year for a total 2018 increase of 1.8%. And ISM said that manufacturing respondents expect the U.S. dollar to see gains against the seven major currencies of major trading partners in 2018, matching 2016.

The current manufacturing operating rate is at 85.8, with production capacity expected to be up 2.7% in 2018.

“Everything looks to be set up pretty well,” said Tim Fiore, chair of the ISM Business Survey Committee. “There are good gains intact and also expected for 2018 and things, like capital expenditure projections, got better as the year went on. All in all, things look pretty good.”

The 12-month outlook for manufacturing, known in the report as the diffusion index, headed up from 67.5 for 2017 to 81.5 heading into 2018, based on feedback from member correspondents.

As for what the primary drivers of manufacturing growth are, Fiore did not hesitate to cite new orders growth, commonly referred to as the engine that drives manufacturing.

“It is the single biggest driver,” he explained, “and has been over 60 for the last four months (a reading of 50 or above indicates growth). Based on feedback from our panel, growth in the general economic outlook without being tied to anything specific was also noted.”

Even though there is decent growth, Fiore noted there are concerns related to wage pressure, with wage growth needing to occur.

For non-manufacturing, the report expects sector revenues to see a 6% increase in 2018, ahead of the 5.7% 2017 gain over 2016, with 59% of non-manufacturing respondents expecting an increase in 2018 revenue, with 17 of the 20 sectors in the report expecting gains, matching May’s report.

Non-manufacturing production capacity, or the capacity to produce products or provide services in this sector was up 2.9% in 2017, which edged out May’s projection of 2.7%. And capital expenditures rose 7% in 2017 and are expected to see a 3.8% increase in 2018.

Non-manufacturing capital expenditures were up 7% in 2017, with a 3.8% increase expected in 2018. Prices paid rose 1.6% in 2017 and are expected to head up 2.2% in 2018. ISM said non-manufacturing employment is expected to see a 1.5% gain in 2018.

“These numbers continue to show that the economy has been, and remains, strong,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “Looking back over the last few years, what has been an anchor on the economy has been what was going on globally, and now we are seeing the global economy doing better and healthier. This has helped to be one of the variables influencing the domestic economy. When you look at that, coupled with consumer confidence and increases in discretionary spending, as well as when we look at fiscal policy seeing a positive impact, too. There was a bit of a ‘Trump Bump’ earlier in the year, which has carried through in the form of 100 straight months of growth for non-manufacturing.”

Like in manufacturing, the non-manufacturing diffusion index is also trending up, too, with 2017 ending up at 69% and 2018 estimated at 73.5%.