ISM Semiannual Economic Forecast December 2017

ISM Semiannual Economic Forecast – December 2017

NEWS RELEASE

FOR RELEASE:10:00 A.M. ET DECEMBER 11, 2017

Contact:Kristina M. Cahill

Research Manager

Report On Business®Analyst

Tempe, Arizona

+1.480.455.5910

email:

ISM® REPORTS ECONOMIC GROWTH TO CONTINUE IN 2018

Manufacturing Growth Expected in 2018

Revenue to Increase 5.1%

Capital Expenditures to Increase 2.7%

Capacity Utilization Currently at 85.8%

Non-Manufacturing Growth Projected in 2018

Revenue to Increase 6%

Capital Expenditures to Increase 3.8%

Capacity Utilization Currently at 91.9%

(Tempe, Arizona) —Economic growth in the United States will continue in 2018, say the nation’s purchasing and supply management executives in theDecember 2017 Semiannual Economic Forecast.Expectations are for a continuation of the economic recovery that began in mid-2009, as indicated in the monthly ISM®Report On Business®. The manufacturing sector is optimistic about growth in 2018, with revenues expected to increase in 16 manufacturing industries, and thenon-manufacturing sector indicates that 17 of its industries will see higher revenues.Capital expenditures, a major driver in the U.S. economy, are expected to increase by 2.7percent in the manufacturing sector andincrease by 3.8percent in the non-manufacturing sector. Manufacturing expects that its employment base will grow by 1.2 percent, while non-manufacturing expects employment growth of 1.5 percent.

These projections are part of the forecast issued by the Business Survey Committee of Institute for Supply Management® (ISM®). The forecast was released today by Timothy R. Fiore, CPSM, C.P.M, chair of the ISM Manufacturing Business Survey Committee, and by Anthony S. Nieves, CPSM, C.P.M., A.P.P, CFPM, chair of the ISM Non-Manufacturing Business Survey Committee.

Manufacturing Summary

Expectations for 2018are positive, as 70percent of survey respondents expect revenues to be greater in 2018than in 2017. The panel of purchasing and supply executives expects a 5.1 percent net increase in overall revenues for 2018, compared to a 4.6percent increase predictedfor 2017over 2016revenues. The 16 manufacturing industries expecting revenue improvement in 2018over 2017— listed in order — are: Fabricated Metal Products; Electrical Equipment, Appliances & Components;Nonmetallic Mineral Products; Machinery; Miscellaneous Manufacturing; Computer & Electronic Products; Transportation Equipment; Plastics & Rubber Products; Primary Metals; Paper Products; Textile Mills; Chemical Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Printing & Related Support Activities; and Petroleum & Coal Products.

“Manufacturing purchasing and supply executives expect to see growth in 2018. They are optimistic about their overall business prospects for the first half of 2018, with business continuing to expand through the second half of 2018," saysFiore. "In 2017, manufacturing experienced 11straight months of growth from January through November,resulting in an average PMI® of 57.4, as compared to 51.5for2016,as reported in the monthly Manufacturing ISM Report On Business®.Respondents expect raw materials pricing pressures in 2018to increase,and expect their profit margins will improve in 2018over 2017. Manufacturers are also predicting growth in both exports and imports in 2018.”

In the manufacturing sector, respondents report operating at 85.8 percent of their normal capacity, up 3.3 percentage points from the 82.5 percent reported in May2017. Purchasing and supply executives predict that capital expenditures will increase by 2.7percent in 2018over 2017, compared to the8.7 percent increase reported for 2017over 2016.Manufacturers have an expectation that employment in the sector will growby 2.3 percent in 2017 relative to December 2016 levels, while labor and benefit costs are expected to increase an average of 2.1 percent in 2018.Respondents also expect the U.S. dollar to strengthen against all seven currencies of major trading partners in 2018, as was the case in 2017.

The panel predicts the prices paid for raw materials will increase by 1.3 percent during the first four months of 2018, and will increase an additional 0.5 percent during the balance of the year, with an overall increase of 1.8 percent for 2018. This compares to a reported 2.1 percent increase in raw materials prices for 2017compared with 2016.

Fourspecial questions were asked of our panel.

1. The first special question asked about the difficulty hiring workers to fill open positions in the past six months. The responses from our manufacturing panel, with percentages of the total number of responses noted, were “Yes” (64.7%), “No” (33.8%), and “Not applicable (no open positions)” (1.4%).

1. The second special question asked if the firm had raised wages to recruit new hires. The responses from our manufacturing panel, with percentages of the total number of responses noted, were “Yes” (44.4%), “No” (53.1%), and “Not applicable” (2.4%).

1. The third special question asked if the firm had offered additional training to new hires. The responses from our manufacturing panel, with percentages of the total number of responses noted, were “Yes” (44.4%), “No” (50.2%), and “Not applicable” (5.4%).

4a. The fourth special question asked whether the firm has increased, decreased or left unchanged its capital spending plans for the next 12 months. The responses from our manufacturing panel, with percentages of the total number of responses noted, were “Increased capital spending plans” (39.9%), “Decreased capital spending plans” (16.3%), and “No change to capital spending plans” (43.8%).

4b. When asked why in response to the previous question; 66 percent of respondents reported

“General Business Outlook”, (5.8%) of respondents reported “Prospects for Business Tax Reform”, (2.9%) reported “Prospects for Regulatory Reform”, (13.6%) reported “Other” and (11.7%) reported “Not Applicable”.

Non-Manufacturing Summary

Fifty-nine percent of non-manufacturing supply management executives expect their 2018 revenues to be greater than in 2017. They currently expect a 6 percent net increase in overall revenues for 2018 compared to a 5.7 percent increase reported for 2017 over 2016 revenues. The 17 non-manufacturing industries expecting revenue improvement in 2018 over 2017 — listed in order — are: Information;Professional, Scientific & Technical Services; Construction; Agriculture, Forestry, Fishing & Hunting; Management of Companies & Support Services; Retail Trade; Real Estate, Rental & Leasing; Transportation & Warehousing; Wholesale Trade; Other Services; Health Care & Social Assistance; Arts, Entertainment & Recreation; Finance & Insurance; Educational Services; Accommodation & Food Services; Public Administration; and Mining.

“Non-manufacturing supply managers report operating at 91.9 percent of their normal capacity, higher than the 86.9 percent reported in May 2017. They are optimistic about continued growth in the first half of 2018 compared to the second half of 2017, even though there is a projected decrease in growth rate for capital reinvestment,” says Nieves. “They forecast that their capacity to produce products and provide services will rise by 3.4 percent during 2018, and capital expenditures will increaseby 3.8 percent from 2017 levels. Non-manufacturers also predict their employment will increase by 1.5 percent during 2018.”

Respondents in non-manufacturing industries expect the prices they pay for materials and services will increase by 2.2percent during 2018. They also forecast their overall labor and benefit costs will increase 2.6 percent in 2018. Profit margins are reported to have decreased in the second and third quarters of 2017, and respondents expect them to increase between now and May2018.

The same four special questions were asked of our non-manufacturing panel.

1. The first special question asked about the difficulty hiring workers to fill open positions in the past six months. The responses from our non-manufacturing panel, with percentages of the total number of responses noted, were “Yes” (61.1%), “No” (32.9%), and “Not applicable (no open positions)” (6.0%).

1. The second special question asked if the firm had raised wages to recruit new hires. The responses from our non-manufacturing panel, with percentages of the total number of responses noted, were “Yes” (37.3%), “No” (57.2%), and “Not applicable” (5.4%).

1. The third special question asked if the firm had offered additional training to new hires. The responses from our non-manufacturing panel, with percentages of the total number of responses noted, were “Yes” (52.1%), “No” (40.7%), and “Not applicable” (7.2%).

4a. The fourth special question asked whether the firm has increased, decreased or left unchanged its capital spending plans for the next 12 months. The responses from our non-manufacturing panel, with percentages of the total number of responses noted, were “Increased capital spending plans” (35.5%), “Decreased capital spending plans” (22.3%), and “No change to capital spending plans” (42.2%).

4b.When asked why in response to the previous question; 66.9 percent of respondents reported

“General Business Outlook”, (4.3%) of respondents reported “Prospects for Business Tax Reform”, (1.8%) reported “Prospects for Regulatory Reform”, (11.7%) reported “Other” and (15.3%) reported “Not Applicable”.

OPERATING RATE

Manufacturing

Manufacturing purchasing and supply executives report their companies are currently operating at 85.8 percent of normal capacity. This is a 3.3 percentincrease when compared to May2017(82.5%), and also an increase when compared to December2016(81.9%).The following 10 industries — listed in order — are operating at or above the average rate of 85.8 percent: Paper Products; Wood Products; Petroleum & Coal Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Computer & Electronic Products; Food, Beverage & Tobacco Products; Plastics & Rubber Products; Transportation Equipment; and Chemical Products.

Non-Manufacturing

Non-manufacturing supply executives report their organizations are currently operating at 91.9 percent of normal capacity. This is higher than the 86.9 percent reported in May 2017, and the 85.2 percent reported in December 2016. Considering the production capacity increases reported in the following section of this forecast, this indicates that non-manufacturing industries are continuing to add capacity, but also find it necessary to maintain their capacity utilization at a relatively high level. The eight industries operating at or above the average capacity level of 91.9 percent — listed in order — are:Health Care & Social Assistance; Arts, Entertainment & Recreation; Educational Services; Utilities; Accommodation & Food Services; Management of Companies & Support Services; Real Estate, Rental & Leasing; and Public Administration.

Operating Rate

Manufacturing

/

Non-Manufacturing

Dec 2016 / May 2017 / Dec 2017 / Dec 2016 / May 2017 / Dec
2017
90%+ / 38% / 37% / 50% / 50% / 62% / 58%
50%-89% / 61% / 60% / 49% / 48% / 36% / 40%
Below 50% / 1% / 3% / 1% / 2% / 2% / 2%
Est. Overall Average / 81.9% / 82.5% / 85.8% / 85.2% / 86.9% / 91.9%

PRODUCTION CAPACITY

Manufacturing

Production capacity in manufacturing increased 4.3 percent in 2017,as 46percent of purchasing and supply executives reported an average capacity increase of 10.5 percent, 6percent reported an average decrease of 9.8 percent, and 48percent reported no change. This compares to a predicted increase in production capacity of 3.3 percent for 2017made in May2017. Expectations for 2018are for an increase of 2.7 percent.The 17industries that report achieving an increase in production capacity in 2017— listed in order — are: Textile Mills; Electrical Equipment, Appliances & Components;Wood Products; Miscellaneous Manufacturing; Nonmetallic Mineral Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Machinery; Primary Metals; Plastics & Rubber Products; Paper Products; Transportation Equipment; Computer & Electronic Products; Chemical Products; Furniture & Related Products; and Petroleum & Coal Products.

Manufacturing Production Capacity

Predicted For 2017

/

Reported For 2017

/

Predicted For 2018

Predicted
May2017 / Magnitude of Change / Reported Dec 2017 / Magnitude of Change / Predicted
Dec 2018 / Magnitude of Change
Higher / 38% / +10.9% / 46% / +10.5% / 48% / +7.4%
Same / 55% / NA / 48% / NA / 49% / NA
Lower / 7% / -13.7% / 6% / -9.8% / 3% / -27.3%
Net Average / +3.3% / +4.3% / +2.7%

The principal means of achieving increases in production capacity in 2017were (in order of importance):

1. More hours worked with existing personnel
2. Additional personnel (permanent, temporary or contract)
3. Additional plant and/or equipment
4. Replaced equipment with technically advanced equipment

Non-Manufacturing

The capacity to produce products or provide services in the non-manufacturing sector increased 2.9 percent during 2017. This compares to the 1.9 percent increase reported in December 2016 for the year 2016, and is greater than theMay2017 prediction of, a 2.7 percent increase for 2017. For 2018, an increase of 3.4 percent is predicted. For 2017, 32 percent of non-manufacturing supply managers indicate increases averaging 10.9 percent, and 6 percent of respondents indicate decreases averaging 9.4 percent. Sixty-two percent see no change in their capacity. The 15 industries reporting increases in capacity in 2017 — listed in order — are:Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; Management of Companies & Support Services; Wholesale Trade; Information; Construction; Health Care & Social Assistance; Real Estate, Rental & Leasing; Retail Trade; Professional, Scientific & Technical Services; Transportation & Warehousing; Public Administration; Educational Services; Finance & Insurance; and Accommodation & Food Services.

Non-Manufacturing Production or Provision Capacity

Predicted For 2017 / Reported For 2017 / PredictedFor 2018
Predicted
May2017 / Magnitude of Change / Reported
Dec 2017 / Magnitude of Change / Predicted
Dec 2017 / Magnitude of Change
Higher / 28% / +11.6% / 32% / +10.9% / 39% / +8.9%
Same / 68% / NA / 62% / NA / 59% / NA
Lower / 4% / -12.0% / 6% / -9.4% / 2% / -5.7%
Net Average / +2.7% / +2.9% / +3.4%

The principal means of achieving increases in production capacity in 2017were (in order of importance):

1. Additional personnel (permanent, temporary or contract)
2. More hours worked with existing personnel
3. Replaced equipment with technically advanced equipment
4. Additional plant and/or equipment

CAPITAL EXPENDITURES — 2017vs. 2016

Manufacturing

Purchasing and supply managers’ report 2017capital expenditures increased 8.7 percent on average when compared to 2016levels. The actual expenditures for 2017were above survey respondents’ previous expectations, as they predicted an increase of 5.2 percent for 2017in May2017. The 44percent of purchasers who reported increased capital expenditures in 2017indicated an average increase of 28.5 percent, while the 15percent who said their capital spending was reduced reported an average decrease of 26.5 percent.Forty-one percent of respondents said they spent the same in 2017as in 2016. The 14industries showing increases in capital expenditures for 2017— listed in order of percentage increase — are: Furniture & Related Products; Wood Products; Computer & Electronic Products; Plastics & Rubber Products; Miscellaneous Manufacturing; Textile Mills; Food, Beverage & Tobacco Products; Primary Metals; Chemical Products; Electrical Equipment, Appliances & Components;Fabricated Metal Products; Paper Products; Nonmetallic Mineral Products; and Printing & Related Support Activities.

Non-Manufacturing

Non-manufacturing supply management executives report their level of capital expenditures in 2017increased 7 percent compared to 2016. This is less than the 10.6 percent increase reported for 2016 one year ago, and more than the 5.2 percent increase predicted by respondents in May2017. Thirty-nine percent report increases averaging 25.4 percent. An additional 11 percent report decreases averaging 26.5 percent. Fifty percent indicate they spent the same on capital expenditures in 2017 as in 2016. The 12 industries experiencing increases in capital expenditures in 2017 — listed in order — are:Arts, Entertainment & Recreation; Construction; Wholesale Trade; Health Care & Social Assistance; Public Administration; Transportation & Warehousing; Professional, Scientific & Technical Services; Utilities; Retail Trade; Accommodation & Food Services; Real Estate, Rental & Leasing; and Management of Companies & Support Services.

Capital Expenditures 2017vs. 2016

Manufacturing

/

Non-Manufacturing

Predicted May2017 / Reported Dec 2017 / Magnitude of Change / Predicted May2017 / Reported Dec 2017 / Magnitude of Change
Higher / 30% / 44% / +28.5% / 36% / 39% / +25.4%
Same / 53% / 41% / NA / 49% / 50% / NA
Lower / 17% / 15% / -26.5% / 15% / 11% / -26.5%
Net Average / +5.2% / +8.7% / +5.2% / +7.0%

PREDICTED CAPITAL EXPENDITURES — 2018vs. 2017

Manufacturing

Purchasing and supply executives expect capital expenditures to increase 2.7%percent in 2018. The 41percent of respondents who predict increased capital expenditures in 2018indicate an average increase of 20.4 percent, while the 17percent who said their capital spending would be reduced predict an average decrease of 31.2 percent. Forty-twopercent said they expect to spend the same in 2018as in 2017. The 13industries predicting increases in capital expenditures for 2018— listed in order of percentage increase — are: Wood Products; Petroleum & Coal Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Textile Mills; Paper Products; Chemical Products; Printing & Related Support Activities; Machinery; Primary Metals; and Nonmetallic Mineral Products.

Non-Manufacturing

Non-manufacturing purchasing and supply executives are expecting anincrease of 3.8percent in capital expenditures in 2018, less than the increase of 7 percent they are reporting for 2017. The 45 percent of respondents expecting to spend more on capital expenditures predict an average increase of 16.6 percent. An additional 13 percent anticipate a decrease averaging 26.3 percent. Forty-two percent expect to spend the same on capital expenditures in 2018 as in 2017. The 13 industries expecting increases in capital expenditures in 2018 — listed in order of percentage increase — are:Utilities; Public Administration; Transportation & Warehousing; Real Estate, Rental & Leasing; Retail Trade; Professional, Scientific & Technical Services; Information; Health Care & Social Assistance; Management of Companies & Support Services; Other Services; Finance & Insurance; Mining; and Wholesale Trade.

Predicted Capital Expenditures 2018vs. 2017

Manufacturing

/ Non-Manufacturing
Predicted
Dec 2017 / Magnitude
of Change / Predicted
Dec 2017 / Magnitude
of Change
Higher / 41% / +20.4% / 45% / +16.6%
Same / 42% / NA / 42% / NA
Lower / 17% / -31.2% / 13% / -26.3%
Net Average / +2.7% / +3.8%

PRICES — Changes Between End of 2016and End of 2017

Manufacturing

After an earlier forecast in May2017of a 2.5 percent increase in prices paid for raw materials in 2017, survey respondents now report realized price increases averaging 2.1 percent for the year 2017. The 60percent who say their prices are higher now than at the end of 2016report an average increase of 4.5 percent, while the 16percent who report lower prices averaged a 4.1 percent decrease. The remaining 24percent indicate no change between the end of 2017and the end of 2016. The 14industries experiencing average price increases in 2017— listed in order —are: Wood Products; Textile Mills; Fabricated Metal Products; Plastics & Rubber Products; Chemical Products; Paper Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Machinery; Furniture & Related Products; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Miscellaneous Manufacturing; and Printing & Related Support Activities.

Manufacturing Price Changes Between End of 2016and End of 2017

Predicted Dec 2016 / Magnitude
of Change / Predicted May2017 / Magnitude of Change / Reported
Dec 2017 / Magnitude
of Change
Higher / 55% / +4.3% / 64% / +4.8% / 60% / +4.5%
Same / 21% / NA / 23% / NA / 24% / NA
Lower / 24% / -4.4% / 13% / -4.5% / 16% / -4.1%
Net Average / +1.3% / +2.5% / +2.1%

Non-Manufacturing

As 2017 draws to a close, non-manufacturing supply managers report prices they pay have increased by 1.6 percent this year. This is slightly more than the 1.5 percent increase they predicted in May2017, and less than the 1.8 percent increase for 2017 predicted one year ago. Fifty-four percent of purchasers report price increases averaging 4.8 percent. Thirteen percent of purchasers indicate decreased prices with an average reduction of 6.8 percent, and 33 percent of respondents have not experienced overall price changes this year. The 11 industries reporting price increases in 2017 — listed in order — are:Construction; Wholesale Trade; Professional, Scientific & Technical Services; Accommodation & Food Services; Arts, Entertainment & Recreation; Public Administration; Transportation & Warehousing; Finance & Insurance; Educational Services; Utilities; and Real Estate, Rental & Leasing.

Non-Manufacturing Price Changes Between End of 2016and End of 2017

Predicted Dec 2016 / Magnitude
of Change / Predicted May2017 / Magnitude of Change / Reported
Dec 2017 / Magnitude
of Change
Higher / 53% / +4.7% / 49% / +4.4% / 54% / +4.8%
Same / 36% / NA / 39% / NA / 33% / NA
Lower / 11% / -6.1% / 12% / -5.5% / 13% / -6.8%
Net Average / +1.8% / +1.5% / +1.6%

PRICES – Predicted Changes Between End of 2017and May2018

Manufacturing

Fifty-seven percent of purchasing and supply managers expect the prices they pay to increase in early 2018by an average of 3.2 percent. At the same time, 14percent anticipate decreases averaging 3.4 percent. Including the 29percent who expect no change in prices in the first four months of 2018, purchasers expect the net average overall price change to increase 1.3 percent. The 11industries predicting a higher than 1.3 percent average increase in prices paid in the first part of 2018— listed in order — are: Wood Products; Textile Mills; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Primary Metals; Chemical Products; Fabricated Metal Products; Paper Products; Plastics & Rubber Products; Nonmetallic Mineral Products; and Machinery.