ISM Reports Economic Improvement Will Continue In 2021

By Steve Clouther

Category:
Industry Trends

Economic improvement will continue in the United States in 2021, say the nation’s purchasing and supply management executives in the December 2020 Semiannual Economic Forecast.  This expansion will continue a growth trend that began in June 2020, as indicated in the monthly ISM Report On Business.  Revenues are expected to increase in 15 of 18 manufacturing industries and 12 of 18 services-sector industries.

Economic improvement will continue

 

Manufacturing Summary

Expectations for 2021 are positive, as 59 percent of survey respondents expect revenues to be greater in 2021 than in 2020. The panel of purchasing and supply executives expects a 6.9-percent net increase in overall revenues for 2021, compared to a 1.3-percent decrease reported for 2020. Fifteen of the 18 manufacturing industries expect revenue improvement in 2021, listed in order: Printing & Related Support Activities; Transportation Equipment; Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Machinery; Computer & Electronic Products; Primary Metals; Plastics & Rubber Products; Fabricated Metal Products; Miscellaneous Manufacturing; Chemical Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Furniture & Related Products; and Paper Products.

Manufacturing Operating Rate

Manufacturing purchasing and supply executives report their companies are currently operating at 85.7 percent of normal capacity. This is a 9.8-percentage point increase when compared to May 2020 (75.9 percent) and an increase when compared to December 2019 (83.7 percent). The following 11 industries — listed in order — are operating at or above the average rate of 85.7 percent: Wood Products; Paper Products; Electrical Equipment, Appliances & Components; Chemical Products; Food, Beverage & Tobacco Products; Primary Metals; Apparel, Leather & Allied Products; Plastics & Rubber Products; Computer & Electronic Products; Fabricated Metal Products; and Furniture & Related Products.

Manufacturing Production Capacity

Production capacity in manufacturing increased 0.5 percentage point in 2020, as 32 percent of purchasing and supply executives reported an average capacity increase of 11 percent, 19 percent reported an average decrease of 15.7 percent, and 48 percent reported no change. This compares to a predicted decrease in production capacity of 3.6 percent for 2020 made in May 2020. Expectations for 2021 are for an increase of 5.3 percent. The 16 industries that expect an increase in production capacity in 2021 — listed in order — are: Printing & Related Support Activities; Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Machinery; Transportation Equipment; Plastics & Rubber Products; Furniture & Related Products; Wood Products; Primary Metals; Miscellaneous Manufacturing; Chemical Products; Computer & Electronic Products; Electrical Equipment, Appliances & Components; and Paper Products.

Manufacturing Capital Expenditures — 2020 vs. 2019

Purchasing and supply managers report 2020 capital expenditures decreased 2.4 percent on average when compared to 2019 levels. Expenditures for 2020 beat survey respondents’ previous expectations, as they predicted a decrease of 19.1 percent for 2020 in May 2020. The 23 percent of purchasers who reported increased capital expenditures in 2020 indicated an average increase of 31.9 percent, while the 34 percent who said their capital spending was reduced reported an average decrease of 29.1 percent. Forty-three percent of respondents said their levels of spend were unchanged in 2020. The seven industries showing increases in capital expenditures for 2020 — listed in order of percentage increase — are: Textile Mills; Food, Beverage & Tobacco Products; Fabricated Metal Products; Plastics & Rubber Products; Chemical Products; Transportation Equipment; and Machinery.

Manufacturing Predicted Capital Expenditures — 2021 vs. 2020

Purchasing and supply executives expect capital expenditures to increase 2.4 percent in 2021. The 29 percent of respondents who predict increased capital expenditures in 2021 indicate an average increase of 26.4 percent, while the 16 percent who said their capital spending would be reduced predict an average decrease of 32.7 percent. Fifty-five percent said they expect to spend the same in 2021 as in 2020. The 10 industries predicting increases in capital expenditures above the average increase of 2.4 percent for 2021 — listed in order of percentage increase — are: Paper Products; Nonmetallic Mineral Products; Primary Metals; Textile Mills; Furniture & Related Products; Fabricated Metal Products; Transportation Equipment; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; and Computer & Electronic Products.

Manufacturing Prices — Predicted Changes Between End of 2020 and May 2021

Fifty-two percent of purchasing and supply managers expect the prices they pay to increase in early 2021 by an average of 6.1 percent. At the same time, 12 percent anticipate decreases averaging 5.8 percent. Including the 36 percent who expect no change in prices in the first five months of 2021, purchasers expect a net average overall price increase of 2.5 percent. The 11 industries predicting a higher than 2.5 percent average increase in prices paid in the first part of 2021 — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Fabricated Metal Products; Furniture & Related Products; Printing & Related Support Activities; Wood Products; Electrical Equipment, Appliances & Components; Nonmetallic Mineral Products; Machinery; Food, Beverage & Tobacco Products; and Paper Products.

Manufacturing Prices — Predicted Changes Between End of 2020 and End of 2021

Respondents predict a net average increase in prices paid of 2.9 percent between December 2020 and December 2021. Fifty-seven percent of respondents expect an average price increase of 6.9 percent for the full year of 2021, while 16 percent expect an average reduction of 6.3 percent. The remaining 27 percent expect no change in their average prices paid for the year 2021. The 11 industries expecting price increases above the predicted average of 2.9 percent by the end of 2021 — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Furniture & Related Products; Wood Products; Chemical Products; Food, Beverage & Tobacco Products; Machinery; Paper Products; and Petroleum & Coal Products.

Manufacturing Labor and Benefit Costs — Predicted Rate Change End of 2020 vs. End of 2021

Purchasing and supply executives expect higher overall labor and benefit costs for 2021. Fifty-two percent of respondents expect labor and benefit costs to grow by an average of 5.6 percent for all of 2021, while the 4 percent forecasting lower costs see them decreasing by an average of 6.7 percent. Including the 44 percent of respondents who believe costs will remain the same, the overall net rate of increase is expected to be 2.7 percent for the year. The seven industries expecting to pay an increase of 2.7 percent or greater — listed in order of percentage increase — are: Printing & Related Support Activities; Furniture & Related Products; Apparel, Leather & Allied Products; Primary Metals; Nonmetallic Mineral Products; Transportation Equipment; and Fabricated Metal Products.

Manufacturing Employment — Change in Overall Employment

ISM's Manufacturing Business Survey Committee members report that sector employment decreased 2.6 percent in 2020, and forecast that employment will increase by 2.5 percent, on average, for the full year of 2021. Thirty-seven percent of respondents expect employment to be 9.1 percent higher in 2021, while 12 percent predict employment to be lower by 7.9 percent. The remaining 51 percent of respondents expect their employment levels to be unchanged in 2021. The 13 industries predicting increases in employment in 2021 — listed in order — are: Printing & Related Support Activities; Apparel, Leather & Allied Products; Transportation Equipment; Primary Metals; Nonmetallic Mineral Products; Fabricated Metal Products; Plastics & Rubber Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Machinery and Paper Products.

Manufacturing Inventory-To-Sales Ratio

Of the manufacturing panel, 20 percent anticipate increasing their purchased inventory-to-sales ratio during 2021. An additional 15 percent expect their ratio to drop, and 65 percent see no change. The diffusion index of 52.8 percent suggests the inventory-to-sales ratio will increase in 2021.

U.S. Dollar — Predicted Strength vs. Major Trading Currencies — in 2021 — Manufacturing Only

Purchasing and supply executives are expecting the U.S. dollar will weaken in 2021 against all the foreign currencies listed here (Euro, Canada $, British Pound, Japanese Yen, Mexican Peso, Korean Won, and Taiwan $), except the Mexican peso.  The average diffusion index for this forecast is 48.3 percent, a decrease of 11.3 percentage points compared to the December 2019 forecast average of 59.6 percent for 2020.

Manufacturing Business Revenues Prediction for 2021

Manufacturing survey respondents forecast that business revenues for 2021 will be stronger than in 2020. The 59 percent of respondents forecasting better organizational business revenues in 2021 estimate an average increase of 12.7 percent. This contrasts with an average decrease of 7 percent forecast by the 10 percent who predict lower business revenues in 2021. Including the 31 percent who see no change in 2021, the forecast for overall net increase in business revenues for 2021 is 6.9 percent. Fifteen of the 18 manufacturing industries are expecting revenue improvement in 2021, listed in order: Printing & Related Support Activities; Transportation Equipment; Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Machinery; Computer & Electronic Products; Primary Metals; Plastics & Rubber Products; Fabricated Metal Products; Miscellaneous Manufacturing; Chemical Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Furniture & Related Products; and Paper Products.

Manufacturing Profit Margins

Survey respondents report that profit margins decreased on average during the second and third quarters of 2020, as 28 percent experienced an increase in profit margins, 36 percent had lower margins, and 36 percent reported no change. Expectations are higher between now and May 2021, as 39 percent of respondents forecast better profit margins, 15 percent predict lower profit margins, and 46 percent predict no change. The 12 industries expecting an increase in profit margins through May 2021 — listed in order of percentage increase — are: Plastics & Rubber Products; Textile Mills; Primary Metals; Electrical Equipment, Appliances & Components; Machinery; Fabricated Metal Products; Computer & Electronic Products; Nonmetallic Mineral Products; Chemical Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; and Transportation Equipment.

Manufacturing Outlook for the Next 12 Months

Compared to the outlook for 2020 reported in December 2019, survey respondents this year are more optimistic about the outlook for 2021. Sixty-three percent of respondents believe 2021 will be better than 2020. Thirty percent of respondents believe 2021 will be the same as 2020, and 7 percent believe 2021 will be worse than 2020. The resulting diffusion index for the outlook for 2021 is 77.8 percent, compared with 59.1 percent for 2020 from one year ago.

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