Manufacturing Contraction Expected in 2009

Expectations for 2009 are for the adverse conditions experienced in the second half of 2008 to continue in manufacturing, while the non-manufacturing sector foresees marginal growth, say the nation’s purchasing and supply management executives in their December 2008 Semiannual Economic Forecast.

The overall forecast lacks the sense of optimism that purchasing and supply managers have typically expressed about the U.S. economy in their annual forecast. The manufacturing sector overall is pessimistic about prospects in 2009, with revenues expected to decline in 12 of 18 industries, while the non-manufacturing sector appears more positive about the year ahead with 8 of 18 industries expecting higher-than-average revenues. Business investment, a major driver in the U.S. economy, will decline as both sectors expect a combined 7.6 percent decline in capital spending.

These projections are part of the forecast issued by the Business Survey Committee of the Institute for Supply Management (ISM).

Expectations for 2009 are pessimistic as 65 percent of survey respondents expect revenues to be the same or smaller in 2009 than in 2008. The panel of purchasing and supply executives expects a 1.1 percent net decrease in overall revenues for 2009, compared to a 2.2 percent decrease reported for 2008. Manufacturing industries expecting improvement over 2008 — listed in order — are: Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; and Chemical Products. Industries expecting a decline over 2008 — listed in order — are: Primary Metals; Nonmetallic Mineral Products; Fabricated Metal Products; Textile Mills; Computer & Electronic Products; Machinery; Paper Products; Furniture & Related Products; Transportation Equipment; and Plastics & Rubber Products.

In the manufacturing sector, respondents report operating at 75.2 percent of their normal capacity, down from 78.6 percent reported in April 2008. Purchasing and supply executives predict that capital expenditures will decrease by 6.7 percent in 2009, compared to a 5.9 percent increase reported for 2008. Survey respondents also forecast that they will reduce inventories in an effort to decrease their purchased inventory-to-sales ratio in 2009. Manufacturers have an expectation that employment in the sector will decline by 2.7 percent, while labor and benefits costs are expected to increase an average of 1.9 percent in 2009. Manufacturing purchasers are predicting strength in exports but weakness in imports. They also expect the U.S. dollar to strengthen on average against the currencies of major trading partners.

The panel also predicts the prices they pay will decrease 2.3 percent during the first four months of 2009, and will decrease an additional 0.3 percent during the balance of 2009, with an overall decrease of 2.6 percent for 2009. Respondents' major concerns are: weak economy/recession; credit crisis; consumer spending; automobile industry; and housing.

A special question was asked to determine the progress of organizations in achieving efficiencies from the application of technology to supply management. Respondents believe they are only 48.1 percent complete on average in achieving benefits from technology in their supply chain, indicating there is still significant improvement to be gained from the application of technology in manufacturing.

Survey respondents expect to realize supply chain improvements through new or improved enterprise technology; cost reduction; supplier consolidation; improved inventory management; and improved supplier management practices.

OPERATING RATE: Manufacturing purchasing and supply executives report that their companies are currently operating at 75.2percent of normal capacity. This is a decrease when compared to April 2008 (78.6 percent) and significantly less than the rate reported in December 2007 (82.9 percent). The November data from the Manufacturing ISM Report On Business® indicates the manufacturing sector is in its fourth month of contraction. The following 10 industries are operating above the average capacity of 75.2 percent: Paper Products; Printing & Related Support Activities; Computer & Electronic Products; Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; Textile Mills; Petroleum & Coal Products; Chemical Products; Miscellaneous Manufacturing(a); and Primary Metals. Industries operating below the average capacity are: Nonmetallic Mineral Products; Plastics & Rubber Products; Transportation Equipment; Furniture & Related Products; Wood Products; Machinery; Electrical Equipment, Appliances & Components; and Fabricated Metal Products.

PRODUCTION CAPACITY: Production capacity in manufacturing decreased 0.8 percent in 2008 as 36 percent of purchasing and supply executives reported an average capacity increase of 10.3 percent, 23 percent reported decreases averaging 20 percent, and 41 percent reported no change. This compares to a predicted increase of 2.5 percent for 2008 made in April 2008. Expectations for 2009 are for an increase of 2.1 percent. The following industries report achieving an increase in production capacity in 2008: Petroleum & Coal Products; Furniture & Related Products; Primary Metals; Paper Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Printing & Related Support Activities; and Fabricated Metal Products. Industries reporting a decrease in production capacity in 2008 are: Nonmetallic Mineral Products; Textile Mills; Miscellaneous Manufacturing(a); Electrical Equipment, Appliances & Components; Transportation Equipment; Wood Products; Chemical Products; Computer & Electronic Products; and Machinery.

CAPITAL EXPENDITURES — 2008 vs. 2007: Purchasing and supply managers report 2008 capital expenditures rose 5.9 percent when compared to 2007 levels. The actual expenditures for 2008 exceed survey respondents’ previous expectations as they predicted an increase of 1 percent for 2008 in April 2008. The 26 percent of purchasers who reported increased capital expenditures in 2008 indicated an average increase of 57 percent, while the 34 percent who said their capital spending was reduced reported an average decrease of 26.8 percent. Forty percent said they spent the same in 2008 as in 2007. Industries showing increases in capital expenditures for 2008 — in order of percentage increase — are: Printing & Related Support Activities; Paper Products; Electrical Equipment, Appliances & Components; Machinery; Apparel, Leather & Allied Products; Transportation Equipment; Primary Metals; and Plastics & Rubber Products. The industries showing decreases in capital expenditures for 2008 are: Wood Products; Petroleum & Coal Products; Nonmetallic Mineral Products; Textile Mills; Chemical Products; Fabricated Metal Products; Computer & Electronic Products; Miscellaneous Manufacturing(a); Food, Beverage & Tobacco Products; and Furniture & Related Products.

Business Revenues Prediction for 2009: Purchasers forecast that 2009 will be worse than 2008 as measured by their revenue expectations. The 35 percent of respondents forecasting better business in 2009 than in 2008 estimate an average nominal (before adjusting for inflation) increase of 9.0 percent in their organizations’ revenues. This is in contrast to an average nominal decrease of 11.2 percent forecast by the 38 percent who predict worse business in 2009. Including the 27 percent who see no change in 2009, the forecast for overall net nominal decline in business revenues for 2009 over 2008 is 1.1 percent. Manufacturing industries expecting improvement over 2008 — listed in order — are: Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Miscellaneous Manufacturing(a); Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; and Chemical Products. Industries expecting a decline over 2008 listed in order are: Primary Metals; Nonmetallic Mineral Products; Fabricated Metal Products; Textile Mills; Computer & Electronic Products; Machinery; Paper Products; Furniture & Related Products; Transportation Equipment; and Plastics & Rubber Products.

PROFIT MARGINS: Survey respondents report that profit margins declined on average during the second and third quarters of 2008 as 15 percent experienced an increase in profit margins, 56 percent had lower margins, and 29 percent reported no change. However, expectations are for a slower rate of contraction between now and April of 2009 as 28 percent of respondents forecast better profit margins, 35 percent predict lower profit margins, and 37 percent predict no change.

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