In the latest Manufacturers’ Outlook Survey from the National Association of Manufacturers (NAM), manufacturers’ optimism has risen to unprecedented heights, driven by their belief that the progress the White House and Congress have made on enacting bold, comprehensive tax reform shows that leaders in Washington are finally embracing policies to help manufacturers in the United States successfully compete in the global marketplace. With 94.6 percent of respondents saying they are positive about their own company’s outlook (Figure 1), this quarter’s optimism level is the highest in the survey’s 20-year history. Optimism has been at historically high levels throughout the year, averaging
91.8 percent in the four quarters of 2017, up from a 64.3 percent average in 2016.
Failure to enact tax reform would have serious ramifications for American manufacturers, as nearly 60 percent said they would lose opportunities to grow their business and more than 20 percent said they would be unable to expand their facilities and hire new workers. An overwhelming two-thirds of manufacturers would consider a vote against tax reform as a vote against their business.
The NAM Manufacturing Outlook Index also jumped to a new record high, rising from 60.7 in the previous quarter to 63.9 this time (Figure 2). Numbers greater than 60 indicate strong levels of optimism, with the percentage positive in their outlook more than one standard deviation from the historical average (74.0 percent positive). It was the fifth straight quarter where the outlook exceeded that average.
Manufacturing Activity on the Upswing
After nearly a decade of economic disruptions, slow growth and policy disappointments, the survey has shown tremendous improvement in the health of the manufacturing sector since the 2016 election (Figure 3). Manufacturers have reported a robust turnaround in activity over the past 12 months, and they are very upbeat in their assessment of demand and output moving forward. Manufacturers are cautiously optimistic that many of the policies they have long sought, such as pro-growth tax reform, a major infrastructure package and regulatory relief, might finally become reality.
Both sales and capital spending are anticipated to increase over the next 12 months at the fastest rates since mid-2011, and employment continues to trend strongly upward.
• Respondents predict sales growth of 5.2 percent over the next year, up from 4.5 percent in the previous release.
• More than 56 percent say their sales will rise by at least 5.0 percent over the next 12 months.
• Capital investments are anticipated to grow 3.4 percent over the next 12 months, up from 2.7 percent in September, reflecting business leaders’ increased confidence in the future.
• Just more than 38 percent of respondents predict capital expenditures will rise by at least 5 percent, with 21.3 percent predicting an increase of more than 10 percent.
• Full-time employment is expected to rise 2.6 percent over the next year, up from 2.2 percent in the previous survey. This is just shy of the 2.7 percent pace recorded in June, which was the fastest rate in the survey’s history.
• Nearly 62 percent of manufacturers anticipate an increase in employment over the next year, with 22.8 percent predicting a jump of at least 5 percent.
Reordering of Business Challenges
Manufacturers’ three highest business challenges remain the same: attracting and retaining a quality workforce, rising health care and insurance costs and an unfavorable business climate (e.g., taxes and regulations) (Figure 4). What has changed is that in all of the surveys up to this year, an unfavorable business climate often appeared near the top of the list; now it is a distant third. The new order reflects manufacturers’ recognition that a dramatic change in the policymaking environment has occurred in Washington since the 2016 election.
The inability to attract and retain a quality workforce is the top business challenge, cited by 72.9 percent of respondents. This continues to be one of the most cited issues for manufacturers, especially as the labor market has tightened significantly.
Next is rising health care and insurance costs, mentioned by 72.3 percent of manufacturers. Costs are anticipated to increase 8.4 percent over the next year, up marginally from 8.3 percent in the previous survey. The majority of manufacturers—75.7 percent—expect their premiums to increase by at least 5.0 percent on average next year, with 39.1 percent predicting costs to rise by at least 10 percent.
An unfavorable business climate came in third, where it has been in every survey so far in 2017, cited by 48.0 percent of respondents. Prior to this year, that issue regularly vied for first place on the list with health care costs, never falling below 70 percent. The likely reason for this significant drop is manufacturers’ belief that the administration will continue to provide regulatory relief and lawmakers will push tax reform forward. That said, several respondents expressed frustration with the slow pace of tax reform and other pro-growth initiatives.
Other highlights in the underlying data include the following:
• Mirroring the sales figures, production is anticipated to jump 5.0 percent over the next year. That question was only added two years ago, and it was the best reading in that time frame.
• Export expectations once again rose in the latest data. Respondents predict 1.4 percent growth in exports over the next 12 months, up from 1.3 percent in the previous survey and the highest rate since the second quarter of 2014. Just more than 41 percent anticipate exports increasing over the next year, with 56.2 percent forecasting exports to be flat.
• Pricing pressures have accelerated modestly with prices for a company’s overall product line predicted to rise 1.9 percent over the coming 12 months, up from 1.8 percent last time. This was the briskest pace for prices since the third quarter of 2014.
• Manufacturers expect their inventories to grow 1.4 percent over the next 12 months, which is the fourth consecutive increase after seven straight quarters of declines, the fastest pace in 19 years. More than 38.0 percent anticipate higher inventory stocks, with 49.5 percent predicting no change. This is consistent with the pickup in activity seen in other measures.
Addressing Workforce Challenges
As noted earlier, manufacturers cited the inability to attract and retain a quality workforce as their top challenge. We wanted to dive deeper into that topic because it has long been an important issue for the NAM, especially for The Manufacturing Institute. In this survey, 79.8 percent of respondents said they have unfilled positions within their company that they are struggling to fill with qualified applicants.
Unfortunately, 34.4 percent of respondents said their company had been unable to take on new business and had lost revenue opportunities because of the inability to attract and retain workers, showing that the skills gap creates real and tangible losses for many companies. However, 52.1 percent said they had not lost business or revenue from their workforce challenges.
In trying to address their skills shortage, two-thirds of manufacturers were working their existing workforce more, with 64.5 percent creating or expanding internal training programs (Figure 7). They were also addressing their workforce challenges by collaborating with educators on skills certification programs (56.5 percent), utilizing temporary staffing services (55.4 percent), encouraging possible retirees to stay longer in their roles (34.5 percent) and working with the local employment office (29.1 percent). For those respondents offering other solutions, examples included using a headhunter, modifying their approaches to recruiting (such as increased usage of social media) and using temporary help. In addition, roughly 10 percent have considered moving to another location to address their workforce needs.