The latest NAM/IndustryWeek Survey of Manufacturers captured the mixed nature of the current economic landscape, which is both hopeful and cautious at the same time. The percentage of respondents who were either somewhat or very positive about their company’s outlook rose from 76.1 percent in September to 78.1 percent in December. This suggests that manufacturing optimism has continued to edge somewhat higher as we have progressed through the year. The outlook has definitely improved from this time last year, when business leaders were grappling with the prospect of the fiscal cliff.
Yet, it was also true that manufacturing activity remains below where it was in the first quarter of 2012, when nearly 89 percent of respondents to the survey were positive in their outlook. Moreover, many of the key indicators of activity eased a bit in the December survey. For instance, sales are expected to grow 3.0 percent over the next 12 months, down from 3.3 percent in September. Even with the lower projection, the numbers continue to be somewhat decent, with two-thirds of manufacturers expecting higher sales over the next year. A similar drop-off was observed for anticipated capital spending, employment, and exports data.
The good news was that a regression model suggests a continued acceleration in activity as we move into next year. Using a model to predict manufacturing production two quarters ahead, it is estimated that output should grow at a 4.0 percent annual rate between now and the second quarter of 2014. To be fair, it should be noted that the increase in the manufacturing production numbers stems largely from higher building permits, consumer spending and the stock market. As stated earlier, the manufacturing outlook variable itself did not change much. Continued downside risks could also derail this projection, and yet, it is nice to see an upbeat assessment for early 2014.
Meanwhile, manufacturers continue to be concerned about rising health insurance costs. Just over three-quarters of respondents cited health care costs as their primary business challenge. This issue has been the top issue all year, and in essence, it has served as a proxy for frustrations with the Affordable Care Act.
In a series of special questions, we learned that 90.6 percent of manufacturers said their health insurance premiums had increased. Some of these firms have also had to increase employee copays (58.6 percent), reduce coverage (27.7 percent) and/or change insurance providers (17.6 percent) to lower their costs. Even after taking these steps, the average increase in health insurance costs within the manufacturing sector for 2014 was 8.76 percent, with just more than three-quarters of respondents saying their increase was at least 5.0 percent.
When asked about how these uncertainties have impacted their business, nearly one-third said they had reduced their outlook for 2014, and a sizable percentage had reduced employment or stopped hiring (23.1 percent) and/or reduced or slowed down their business investment (20.2 percent). While some industry sectors have reduced hours for their employees, a relatively small number of manufacturers have done so as a result of the ACA (7.9 percent).
The second most pressing challenge was an unfavorable business climate (cited by 76.1 percent of respondents). When asked about policies that manufacturers want to see from policymakers in 2014, respondents cited finding ways to reduce the regulatory burden on businesses (76.9 percent) and passing comprehensive tax reform (67.5 percent) as important priorities. In addition, 86.3 percent of manufacturers want the President and Congress to find a long-term solution to the nation’s budgetary challenges; however, they were somewhat skeptical that ongoing budget negotiations would do much to solve the nation’s long-term debt and deficit challenges.
Chad Moutray is the chief economist, National Association of Manufacturers.