Wednesday, June 20, 2018

Manufacturers' Optimism At Record High Too

Last week I noted the NFIB Small Business Optimism Index reached the second highest level in its 45 year history. As a follow on, the National Association of Manufacturers released their Second Quarter Outlook Survey today and reported manufacturers' optimism registered 95.1%, the highest level ever recorded in the 20-year old survey.

Many positive takeaways can be extracted from the survey report. One notable one surrounds manufacturers' perspective on the business environment. The report notes,
"the “business environment” is no longer the concern that it once was, with just 19.1 percent citing the tax and regulatory climate as being a top concern. Respondents cited an unfavorable business climate as their primary business challenge as recently as two years ago, with three-quarters of manufacturers noting it as their top problem in the second quarter of 2016. This quarter’s survey found manufacturers citing instead the inability to attract and retain a quality workforce as their top concern."

The report contains a comprehensive list of the specific survey questions and response rates of the manufacturers. Importantly, some of the questions get at the cost side and while more than 50% believe material costs will increase over 5% (20.3% thought increases would be in excess of 10%) more than 50% believed sales would increase greater than 5% (25% responded that sales would increase greater than 10%.)

The Outlook Survey also noted the NAM Manufacturing Outlook Index rose to an all-time high of 63.8 from 62.8 with readings over 60 indicating strong levels of optimism. The report noted, "with the percentage positive in their outlook more than one standard deviation from the historical average (74.5 percent positive). This was the seventh straight quarter where the outlook exceeded that average."

On the business front then, much of the sentiment seems to be positive. As noted earlier in this post, and I know this does not get to unit volume, however, if manufacturers believe their sales rise at the same time as raw material input costs increase, they must believe they can pass along the cost increases. Time will tell if this is a correct assumption. Another positive in the report is "attracting and retaining a quality workforce" is manufacturers' biggest challenge. So as long as companies can hire and retain employees, the consumer should continue to have income to spend, and probably growing income at that.

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