Expectations for U.S. manufacturing growth have diminished since the Institute for Supply Management’s year-end outlook in December. Revenue for 2023 is expected to increase, on average, by 1.7 percent. This is 3.8 percentage points lower than the December 2022 forecast of 5.5 percent.

Operating rates, capex and capacity expectations have also softened from the end of last year. On the upside, supply chain problems are levelling off; price pressure is expected to ease; and employment is forecast to grow although hiring remains a challenge. The manufacturing sector will expand modestly for the rest of 2023, ISM panelists predict.

Manufacturers Scale Back Growth Expectations

“Manufacturing continues its comeback from the turmoil that began in 2020 and is expected to continue through this year,” said Tim Fiore, chair of the ISM’s manufacturing survey committee, in a statement. “With 10 manufacturing sectors expecting revenue growth in 2023 and 11 industries expecting employment growth in 2023, panelists forecast that recovery will continue the rest of the year, albeit somewhat softer than originally expected.”

Recent earnings reports from the electronics industry show component makers are struggling. Two global distributors reported their book-to-bill ratios have fallen below parity.  At the same time, distributors aren’t seeing an abnormal rate of order cancellations. Inventory in the supply chain is building but OEMs are holding on to it, distributors said, for fear of future constraints. One executive said the supply chain is in a correction cycle that could least several quarters.

“Having invested heavily to de-risk the supply chain over the last three years due to Covid-19, we are looking to reset with a number of our suppliers to reduce inventory, which has grown steadily over that period,” an electronics executive told the ISM. “Lead times are generally coming down, although electronic components are still a concern.”

Many components remain in short supply, distributors said. These devices are referred to as the “golden screw” that complete projects that are almost fully assembled.

Manufacturers Scale Back Growth Expectations

Source: Institute for Supply Management

ISM’s U.S. factory index hit the six-month contraction mark in April and there’s little sign of an uptick in demand. Many of the impediments to the supply chain – logistics delays, shortages and shutdowns have eased, but inflation is taking its toll on global business. The cost of maintaining inventory in the electronics supply chain has increased due to interest rates. Concerns of customer defaults have so far not materialized, according to supply chain experts.

Capacity

Overall, purchasing and supply executives report that their companies are operating, on average, at 82 percent of normal capacity, 6.4 percentage points lower than the figure reported in December 2022, according to the ISM. Production capacity is expected to increase 0.4 percent in 2023; in December panelists projected an increase of 5.3 percent this year. Twenty-six percent of respondents expect capacity increases of, on average, 12.3 percent; 14 percent expect decreases of, on average, 18.7 percent; and 60 percent expect no change.

Prices & capex

ISM survey respondents expect a 0.4-percent point increase in capital expenditures in 2023, lower than the 2.6-percent increase forecast by the panel in December. Twenty-four percent of respondents predict increased (on average, 23.6 percent) capital expenditures in 2023. Twenty percent said their capital spending would decrease (on average, 26.7 percent), and 56 percent expect no change.

In the December forecast, ISM respondents predicted an increase of 2.5 percent in prices paid during the first four months of 2023; they now report prices increased by 2.3 percent. The 47 percent who say their prices are higher now than at the end of 2022 report an average increase of 8.6 percent, while 23 percent reported lower prices (by 7.7 percent, on average). The remaining 30 percent indicated no change for the period.

Manufacturers expect a year-over-year, net-average price increase of 1 percent for 2023. Prices are projected to ease slightly over the rest of the year. Forty percent of respondents project prices to increase, on average, 7.5 percent for the full year; 24 percent anticipate a decrease (8.2 percent, on average), and 36 percent expect no change.

Employment

Employment got special attention from the ISM because despite softening demand, manufacturers are still trying to hire workers. Respondents forecast that employment in 2023 will increase 0.5 percent year over year. Twenty-five percent of respondents expect employment to be, on average, 7.6 percent higher; 15 percent predict employment to decrease, on average, 9 percent; and 60 percent expect employment levels to be unchanged.Manufacturers expect to add workers in 2023

A majority — 67 percent — of manufacturers said they have difficulty hiring, but less so than in the December period when 77 percent reported problems. In the latest forecast, 26 percent of respondents reported no hiring difficulty, up from 21 percent in December.

Manufacturers are having fewer problems because they’re raising wages, the ISM reported.

Forty-seven percent of those surveyed raised pay, up from 45 percent in December. About one-third — 34 percent – said they didn’t hire as many workers as they would have liked; the same level as December.

Gartner recently noted that turnover is 33 percent higher in supply chain organizations compared to pre-pandemic levels.

Supply chain problems

Despite improvements in lead times, some manufacturers anticipate supply chain problems will remain through Q3 and Q4 of 2023. More than half – 56 percent – expect problems will remain the same through Q3; that drops to 43 percent in Q4. Thirty-eight percent of panelists expect improvement in Q3 and 46 percent in Q4. The reasons for disruption remain unchanged from December; 56 percent of panelists said their problems were with foreign sourcing while 44 percent cited domestic sourcing issues.

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