The collapse of the financial markets, the drops in new residential construction, and the pronouncement that the U.S. is in a recession have all contributed to a general feeling of pessimism about the state of the economy.
 
The results of the Institute for Supply Management December 2008 Semiannual Economic Forecast show just how widespread that pessimism is.
 
Business investment, a major driver in the U.S. economy, is expected to decline as both sectors expect a combined 7.6 percent decline in capital spending. Sixty-five 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 Summary
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.
 
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.
 
Non-Manufacturing Summary
Thirty-six percent of non-manufacturing supply management executives expect their 2009 revenues to be greater than in 2008. They currently expect a 0.7 percent net increase in overall revenues for 2009 compared to a 2.6 percent decrease reported for 2008.
 
Non-manufacturing industries expecting revenue improvement in 2009 over 2008 — listed in order — are: Information; Accommodation & Food Services; Health Care & Social Assistance; Wholesale Trade; Other Services*; Retail Trade; Utilities; and Management of Companies &Support Services.
 
Industries expecting revenue decreases in 2009 — listed in order — are: Professional, Scientific &Technical Services; Arts, Entertainment &Recreation; Construction; Finance &Insurance; Agriculture, Forestry, Fishing &Hunting; Public Administration; Educational Services; Transportation &Warehousing; and Real Estate, Rental &Leasing.
 
Respondents in non-manufacturing industries expect that the prices they pay for materials and services will increase by 2.3 percent during 2009. They also forecast a 1.5 percent increase in their overall labor and benefit costs for 2009.
 
Survey respondents indicate they have achieved an average of 55.2 percent of potential benefits from application of technology to supply chains, and that the increased use of technology and analytical tools is the most frequently cited means of improving supply chains in 2009. Other improvement approaches include: product rationalization and value analysis; supplier consolidation; contract management strategies; and improved supply management processes.
 
Other Highlights from the Report:
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 capacity to produce products or provide services in the non-manufacturing sector increased 0.3 percent during 2008. This is less than the 1.5 percent increase reported in December 2007 for 2007, and is less than the prediction in April 2008 of a 3.9 percent increase in 2008. For 2009, a larger increase (0.6 percent) is predicted.
 
Capital Expenditures -2008 vs. 2009
Manufacturing purchasing and supply executives expect capital expenditures to decrease 6.7 percent in 2009. The 13 percent of respondents who predict increased capital expenditures in 2009 indicate an average increase of 105.4 percent, while the 57 percent who said their capital spending would be reduced predict an average decrease of 35.8 percent; 30 percent said they expect to spend the same in 2009 as in 2008. Industries predicting increases in capital expenditures for 2009 — in order of percentage increase — are: Printing &Related Support Activities; and Food, Beverage &Tobacco Products.
 
Non-manufacturing purchasing and supply executives are expecting a decrease of 8.4 percent in capital expenditures from what they are reporting for 2008 (1.4 percent). The 20 percent of respondents expecting to spend more predict an average increase of 27.8 percent. An additional 50 percent anticipate a decrease averaging 27.5 percent. Wholesale trade is one industry expecting a decrease.
 
Prices Paid -predicted through April 2009
Twenty-seven percent of manufacturing purchasing and supply managers expect the prices they pay to increase in early 2009 by an average of 6.7 percent. At the same time, 47 percent anticipate decreases averaging 8.6 percent.
 
Non-manufacturing survey respondents predict that their purchases in the first four months of 2009 will cost an average of 1.4 percent more than at the end of 2008. This is less than the increase reported in the preceding section for all of 2008. Considering the prediction of price change for all of 2009 (2.3 percent), purchasing and supply executives apparently expect most of next year’s price increase to occur in the first part of the year. Fifty percent of non-manufacturing respondents predict the prices they pay will increase an average of 6.7 percent in the first part of 2009.
 
Employment
ISM’s Manufacturing Business Survey Committee members report that manufacturing employment decreased 4 percent since April 2008, and forecast that it will decrease 2.7 percent in 2009.
 
Twelve percent expect employment to be 9.5 percent higher, while 43 percent predict employment to be lower by 9 percent. Non-manufacturing employment has decreased 3.2 percent since April 2008. They forecast employment will decrease 1.3 percent by the end of 2009.
 
Imports and Exports
Purchasers for manufacturers expect a contraction in imports in the first half of 2009. Of the 85 percent of purchasers who reported they import, 30 percent predict an increase in their imports over the next half year, while 33 percent predict a decrease in imports of materials.
 
Non-manufacturers have lower expectations for use of imports for the first half of 2009 than they did in December 2007 for the first half of 2008. Of the 40 percent of non-manufacturing organizations who reported they import, 22 percent predict an increase in their imports during the first half of 2009. Twenty percent of the respondents predict a decrease in imports of materials and services.
 
The responses for this semiannual report indicate purchasers see increases in new export orders for the first half of 2009. This is inconsistent with the most recent ISM New Export Orders Index data in the monthly Manufacturing ISM Report On Business®, which has shown a contraction in new export orders in the last two months. Of the 79 percent of respondents who export, 36 percent predict an increase over the next half-year. Nineteen percent of respondents predict a decrease in their exports.
 
For the first half of 2009, non-manufacturing supply managers who report their organizations engage in exporting feel less optimistic than they did one year ago concerning their export business. Wholesale Trade was among the industries expecting an increase in export business.
 
Changes to Supply Chain Practices
A significant majority of manufacturing respondents (66 percent) indicated that they would be taking new steps in 2009 to improve their supply chain management practices. The changes include new or improved enterprise technology, cost reduction plans, supplier consolidation, improving inventory management, and improving supplier management practices.
 
Sixty-seven percent of non-manufacturing respondents stated they would be taking steps regarding supply chain improvements in 2009. The most frequently cited approaches include increased use of technology and analytical tools, product rationalization and value analysis, supplier consolidation, contract management strategies, and improving supply processes.
 
Outlook for the Next 12 Months
Supply management executives are pessimistic about conditions over the next year. More than half of respondents expect conditions to worsen. Only 20 percent of manufacturers and 16 percent of non-manufacturers indicated they had a better outlook for the coming months. – Jenel Stelton-Holtmeier