ISM semiannual report calls for manufacturing and non-manufacturing growth over rest of 2016

Even though there are myriad indications that the economy has lost some of its footing in recent months, the May 2016 Semiannual Economic Forecast issued by the Institute for Supply Management indicates that prospects for growth remain fully intact.

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

On the manufacturing side, ISM said revenue is expected to rise by 2.8 percent in 2016, which is down from a 4.1 percent December estimate, with 50 percent of respondents expecting revenues to rise by 10.5 percent or more in 2016 annually. And 14 of the 18 reporting manufacturing sectors in the report are calling for 2016 revenue growth. Capital expenditures are pegged to rise 1.0 percent, which is in line with December's 1.0 percent estimate, and capacity utilization is at 81.7 percent, edging December's 81.6 percent.

Manufacturing production capacity is expected to head up 3.0 percent in 2016, topping the 1.9 percent December estimate.

Prices paid by ISM manufacturing respondents fell 1.1 percent through the end of April, and prices of raw materials are expected to increase 0.6 percent in 2016, which ISM said indicates an expected increase of 1.7 percent in prices over the remainder of 2016. As for manufacturing employment, ISM said it is expected to not change through the end of 2016, which is in line with a modest 0.2 percent December estimate.

“Things are feeling pretty good in manufacturing and reflect how things have been going over the last few months,” Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said in an interview. “We finished 2015 on a soft note, which is how 2016 started, too. That was reflected in the lower revenue forecast from 4.1 percent to 2.8 percent. But the 2.8 percent doubles actual 2015 revenue growth, so that puts things into perspective as things being not great but not bad either.”

The modest 1.0 percent gain in capital expenditures was not surprising in that it was basically flat with December's report and coming off of an 8.3 percent increase in 2015, Holcomb said. And until the ISM's key metric, the PMI, sees sustained growth, he said CFOs want to see more “daylight” before committing to increased spending levels.

For non-manufacturing, the report called for revenues to head up 2.4 percent in 2016, down from December's 2.7 percent projection, with 53 percent of its respondents maintaining that 2016 revenues will be up 8.5 percent or more. And 13 of the 18 non-manufacturing sectors in the report are calling for increased revenues, down from 15 sectors that anticipated higher revenues in 2015.

Non-manufacturing capital expenditures are expected to rise 6.2 percent, down from a 7.5 percent prediction in December, and capacity utilization, which is currently pegged at 86.5 percent for 2016 is off from December's 87.9 percent.

Non-manufacturing production capacity, or the capacity to produce products or provide services in this sector, is expected to rise 1.4 percent in 2016, down from a previous estimate of 2.8 percent. And employment is expected to see a 0.7 percent gain over the balance of 2016, down from December's 1.7 percent prediction.

Prices paid for non-manufacturing services saw a 0.3 percent uptick through April and are expected to rise 0.6 percent over the balance of the year for a cumulative 0.9 percent net increase.

While the projection for non-manufacturing revenues was less than what was hoped for, it does not necessarily mean it below expectations, according to Tony Nieves, chair of the ISM's Non-Manufacturing Business Survey Committee.

“It is still an increase at a time when the PMI (the key metric for non-manufacturing growth) has been strong and it is not as flat as it could have been,” he said.

While capital expenditures saw a lower forecast rate compared to December, Nieves said it is still a really good number.

“We have seen it come in around 3 percent or less across the board, with 3 percent of total revenue sort of being the magic number for capex and reinvestment,” he said. “That makes this current number strong, with companies in these space having so much information available to make decisions, coupled with increased competition and a lack of pricing power, too. That is where the reinvestment comes in across the board.”

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