ISM semiannual report calls for continued economic growth in 2012

While the economic recovery is showing some encouraging signs of late, it received another one this week in the form of the Institute of Supply Management’s (ISM) Semiannual Economic Forecast.

The report, which was released this week, is based on feedback from U.S.-based purchasing and supply executives.

For manufacturing, the report said that manufacturing revenues are expected to increase 5.5 percent in 2012, with capital investment increasing 1.9 percent, and capacity utilization at 79.2 percent.

Some of the other manufacturing-related metrics cited in the report included: prices are expected to increase 2 percent during the first four months of 2012 and 2.9 percent for the entire year; production capacity is expected to rise 5.6 percent; and manufacturing employment is pegged to see a 1.3 percent bump in 2012.

“We have seen in the comments provided for this report that companies are utilizing their existing resources more…and are finding ways to increase productivity and reduce costs at every opportunity,” said Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee. “This will allow them to get more out of their factories with lower increases in labor.”

Holcomb added that manufacturers are optimistic about business prospects for the first half of 2012 and even more optimistic about the second half of 2012, as it has demonstrated its resilience during a challenging economic period and has been growing since August 2009, a period of 28 months.

The report identified various problems the report’s respondents said are facing their manufacturing businesses while planning for 2012, including: poor sales (43.9 percent); government regulations (22 percent); inflation (17.4 percent); cost of labor (4.5 percent); quality of labor (4.5 percent); taxes (4.5 percent); and interest rates and finance (3 percent).

On the non-manufacturing side, revenues are projected to increase 3.1 percent in 2012, with capital investment and capacity utilization pegged at 0.1 percent and 85.2 percent, respectively.

Non-manufacturing production capacity is slated to increase by 3.2 percent in 2012, and prices paid are expected to head up 2.7 percent in 2011, and employment is being forecasted at a 1.1 percent growth rate.

Among the problems the report’s respondents said are facing their non-manufacturing businesses while planning for 2012 are: poor sales (34.4 percent); government regulations (26.4 percent); inflation (10.4 percent); interest rates and finance (10.6 percent); cost of labor (8.8 percent); taxes (5.6 percent); and quality of labor (4.8 percent).

In the “Special Question” section of the report, regarding what supply chain improvements manufacturing and non-manufacturing respondents plan to make in 2012, 74 percent of manufacturers said they intend to improve supply chain management practices, with these five approaches: supplier performance management, strategic sourcing/supply base rationalization, demand planning to reduce supply chain lead times, inventory control and management, and process and information systems improvements.

For non-manufacturing, 72 percent of respondents stated they plan to make improvement to improve supply chain management practices, with the top five approaches to doing so being supply management/process improvement, leverage new and existing technology, contract management, professional development, and strategic sourcing.

“These things are all about doing more with less,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “There has been this correction within companies as to how do they invest to optimize their efficiencies. When you look at the employment in 2012 expected to increase 1.1 percent, it is in line with revenue growth for 2012, but it is not such an increase that it requires a large amount of full-time employment growth.”

Looking at manufacturing inventories, the ISM report said that purchasers plan to decrease inventory on hand by an average of 1.2 percent to support planned 2012 sales levels. And 17 percent of respondents expect to increase their purchased inventory-to-sales ratio in 2012 compared to 29 percent expecting that ratio to decrease and 54 percent calling for no change. The ISM’s diffusion index of 44 percent calls for the inventory-to-sales ratio to decrease in 2012.

Holcomb said manufacturers continue to keep a close eye on inventory management control, with the monthly readings coming in at less than 50 for most of 2011, with the report suggesting there will be even more of an emphasis on doing this in 2012.

“This will be done through a number of mechanisms, including demand planning so they can get direct sales and order information back to their suppliers earlier and with more detail to allow them to be more prepared and shorten lead times, resulting in lower inventories,” said Holcomb. “Strategic sourcing and supply-based rationalization and looking for better suppliers is also key, as are vendor-managed inventory strategies are likely be applied more, with suppliers carrying more inventory on behalf of their customers. The net result is better inventory management and a lower inventory-to-sales ratio.”

While inventories do not play as large of a role on the non-manufacturing side, Nieves explained that for several months, cash flow and cash liquidity and demand pull and just-in-time processes and managing inventories more efficiently than in past years are crucial by being lean and only keeping stock on hand that is necessary.