Positive Manufacturing Forecast despite Slump

Although manufacturing activity contracted in November, experts see growth in the sector in 2016 as the U.S. economy improves.

The Institute for Supply Management announced Tuesday that it expects manufacturing to grow at a higher rate in 2016 than what we saw in 2015. Throughout the year, the ISM expects manufacturing revenue to rise by 4.1 percent, bolstered by stronger demand from consumers.

Although manufacturing activity contracted in November, experts see growth in the sector in 2016 as the U.S. economy improves.

The Institute for Supply Management announced Tuesday that it expects manufacturing to grow at a higher rate in 2016 than what we saw in 2015. Throughout the year, the ISM expects manufacturing revenue to rise by 4.1 percent, bolstered by stronger demand from consumers.

In the service sector, supply managers expect higher activity thanks to a better job market and strong demand at home. “They forecast that their capacity to produce products and provide services will rise by 2.8 percent during 2016, and capital expenditures will increase by 7.5 percent from 2015 levels. Non-manufacturers also predict their employment will increase by 1.7 percent during 2016,” said Bradley J. Holcomb, ISM Chair of the ISM Manufacturing Business Survey Committee.

In manufacturing, strong demand expects to rise for similar reasons, causing optimism throughout the sector. “Manufacturing purchasing and supply executives expect to see growth in 2016. They are optimistic about their overall business prospects for the first half of 2016, and are more optimistic about the second half of 2016,” Holcomb said.

Bigger Profits

In 2015, many publicly traded companies saw their profit margins shrink after strong expansion due to cost cutting in the face of flat revenues since the Global Financial Crisis. However, those cost-cutting measures failed to boost margins, causing the S&P 500 to see the net margins of its constituents fall to 7.71 percent by the 3rd quarter of 2015, down from 8.8 percent in the prior year.

Largely, the decline in profits boils down to a decline in profits, and large losses, throughout the energy sector as oil continues to fall in value. However, the ISM believes this will benefit the profit margins of manufacturing and service-oriented companies in 2016, and expects healthy sales around the world. “Respondents expect raw materials pricing pressures in 2016 to be very low, and expect their profit margins will improve in 2016 over 2015. Manufacturers are also predicting growth in both exports and imports in 2016,” said Holcomb.

The U.S. Dollar

A primary concern for economists has been a steep decline in exports from the U.S. to foreign economies, a trend that has accelerated in recent months. Many attribute this to the rising U.S. dollar, which has appreciated by over 15 percent over the last year versus a basket of foreign currencies. The stronger dollar has made American goods relatively more expensive to the rest of the world, crimping export demand.

However, the ISM believes manufacturers do not harbor concerns about the U.S. dollar’s impact on exports, and they expect exports to grow in 2016. “This indicates that, even though some of our respondents were unsure of the impact of a strong dollar, greater than 60 percent felt the strong dollar did not have a negative impact on their business. In this case, however, the impact was more likely inconsequential rather than positive,” the ISM said in a statement.