The NAM Manufacturing Outlook Index declined from 45.8 in September to 40.5 in the most recent survey, falling below the historical average for the second consecutive quarter. Nearly 60 percent of respondents were either somewhat or very positive about their own company’s outlook, a sharp decline from the 91.2 percent who said the same thing one year ago. Manufacturers continue to wrestle with global headwinds and lower commodity prices, which likely dampened enthusiasm in this report, especially regarding export expectations, with roughly 58 percent suggesting that their firms were negatively impacted by the global slowdown. Capital spending and hiring plans pulled back materially from the prior survey, which we also saw in the latest job openings numbers. On the positive side, manufacturing leaders anticipate 1.4 percent growth in sales and production over the next 12 months. While this pace remained well below the 4.5 percent pace observed in December 2014, it does suggest that activity remains positive, albeit less than desired.
The top business challenge was an unfavorable business climate, cited by 77.3 percent of manufacturing respondents. Indeed, manufacturers continue to be frustrated with the lack of comprehensive tax reform and with a perceived regulatory assault on their businesses. Rising health care and insurance costs were also a major concern, cited by 72.2 percent as a primary challenge. Manufacturers see health insurance costs increasing eight percent over the next 12 months. Small and medium-sized firms anticipate health insurance premiums to jump faster in the next year than large manufacturers do, with rates rising 8.6 percent and 6.5 percent, respectively.
These findings mirror subpar sentiment data from consumers and small businesses out last week. Optimism among small firm owners ebbed somewhat in November, falling to its lowest level in five months, largely on reduced sales expectations. Meanwhile, consumer sentiment in the University of Michigan survey remains lower than desired despite inching slightly higher in preliminary results for December. Confidence has trended lower in that survey since reaching a post-recessionary high in January as the public remains skittish in their economic outlook.
These surveys perhaps help to explain softness in the retail sales figures. While retail spending increased 0.2 percent in November, the pace of consumer spending on a year-over-year basis has decelerated over the course of the past year, down from 4.9 percent in November 2014 to 1.4 percent today. Concerns about the economy can also be seen in the latest consumer credit data, with Americans cautious about taking on new credit card debt in October. With that said, retail sales continue to grow modestly overall, especially when you exclude gasoline station and automotive spending from the analysis to look at the broader market.
Moving forward, business economists expect modest growth in 2016, with real GDP expanding by 2.6 percent. The U.S. economy should benefit from decent consumer and business spending next year, even as net exports remain a drag on growth, and the unemployment rate is predicted to fall to 4.8 percent. As a result, 87 percent of economists—including myself—expect the Federal Open Market Committee (FOMC) to raise short-term interest rates when it meets this week, even though manufacturers remain less enthused about the idea given current global headwinds. The National Association for Business Economics survey specifically cites softness in manufacturing output as an ongoing challenge. In the spring, business economists had predicted 3.7 percent growth in industrial production in 2015, and that figure has fallen to 1.5 percent in this survey. The current outlook for industrial production in 2016 is for 2.2 percent growth, down from 2.5 percent in the prior survey. (My forecast for manufacturing production in 2016 is somewhat lower, roughly 1.7 percent.)
As noted, the largest headlines this week will come from the Federal Reserve. If it does not raise rates, it will be because of worries about weaker-than-desired growth, particularly for manufacturers. Minimal pricing pressures continue to give the Fed the flexibility to be highly accommodative in terms of monetary policy regardless of what it does at the December 15–16 FOMC meeting. In terms of economic data, we will get the final read of the year on manufacturing sentiment from the Kansas City, New York and Philadelphia Federal Reserve Banks and hope to see a rebound in industrial production data for November. In addition, Markit will release preliminary data on new orders and output for the United States and Eurozone. Other economic reports to look for next week include the latest figures for consumer prices, housing starts, leading indicators and state employment.