Current Trends Highlight Manufacturing Challenges

The ISM® PMI® index is a combination of indices regarding new orders, production levels, employment, inventories, prices, order backlogs, and other factors. ISM®’s members are purchasing managers, who tend to be in the know because they are buying materials based on actual and forecast short- and long-term production plans. The monthly ISM® Report on Business® doesn’t show actual measures of those categories, but whether respondents say things are “better,” “worse,” or “about the same.”

The PMI® was at 56.9 in October 2014. (An index above 50 means business was better than the month before.) From October through August, it drifted down to 51.1. The good news is that, for some, business is still growing – 25 percent said business in August was better than in July. That group is smaller than in May, however, when almost 30 percent said they were doing better on a month-to-month basis.

To take a look at some of the components of the PMI®, purchasing managers reported that, since May 2015, growth in new orders is slowing, employment growth is slackening, inventories are shrinking, prices are going down, and order backlogs are getting smaller.

Turning from ISM® to NAM, its new NAM Manufacturing Outlook Index has gone from 61.7 in last year’s 4^th quarter report to 45.6 in 3^rd quarter 2015. (As with the PMI®, the same or better is indicated by an index of 50 or more.) NAM members, manufacturing executives and managers, are more worried than their purchasing managers, as they see a worsening in current conditions and expectations for the future. They see growth continuing, but the rate of growth slowing down.

NAM says manufacturers expect sales growth next year of 2.0 percent, compared to their expectation of 4.5 percent when surveyed last December. Capital investment and employment are expected to grow little over the next year, while expectations last year were more robust. NAM points out that although manufacturers don’t feel as good as they did a year ago, two thirds are generally positive. Things seem good, if not as good, as they did last year.

NAM also asked manufacturers what obstacles were holding them back. More than 75 percent pointed to regulations and taxes and other unfavorable business conditions and also said they were being pressured by the costs of health care coverage for employees. Half of manufacturers responding are still struggling to attract an adequate workforce. They expect steady, though slow hiring in the coming months—not layoffs. A stronger dollar and weakened exports were problems for 40-50 percent of firms. Few were worried about prices or access to capital. Thirty-five percent, however, were delaying capital investment decisions after the expiration of attractive tax incentives at the end of last year.

Should we be worried about manufacturing next year? Manufacturing leaders familiar with good processes for problem analysis know that you must speak with data, not generalizations. In fact, some data indicate that advancement may be on the horizon. For example, MAPI Foundation’s U.S. Industrial outlook forecasts manufacturing production growth of 2.1 percent in 2015, 3.4 percent in 2016 and 3.1 percent in 2017.  

Karen Wilhelm has worked in the manufacturing industry for 25 years, and blogs at Lean Reflections, which has been named as one of the top ten lean blogs on the web.