Manufacturing Growth Outlook

According to Economy.com's latest industry outlook, manufacturing industries are poised for a moderate recovery during the second half of 2003. Although conditions vary across industries, overall manufacturing production has turned up modestly over the past two months, after falling since the middle of last year.

Producers of computer equipment, military goods and processed foods are seeing the strongest gains. Production in most other industries has bottomed out, although it continues to fall in a handful of industries, such as textiles, apparel and paper. Heralding further improvement in the near term, orders for durable goods increased a solid 2.1% in June, the biggest advance since January; moreover, the increase was broad based across most industries.

Revenue growth is just beginning to pick up as pricing power remains poor for most manufacturers. Computer manufacturers are experiencing the strongest rebound as industry revenues were up by 17% in the first quarter compared to a year ago. Industries, such as industrial machinery, are benefiting from higher revenues from foreign sales thanks to the weaker U.S. dollar, even though unit sales abroad have not strengthened. Persistent cost cutting is still the main source of stronger profits, although profit margins are below historic averages for most manufacturing industries. Profitability should strengthen through the remainder of this year into 2004.

Among the strongest manufacturing firms are defense contractors and manufacturers that supply the military, such as electronic equipment manufacturers. Federal defense procurement for aircraft, ships and related equipment, and munitions continues to expand. Companies that supply the military are posting double-digit sales growth, and their order backlogs are rising. Procurement spending is expected to rise by about 5% annually over the next few years, accelerating to a peak growth rate of 12% in fiscal year 2007.

Several manufacturing segments are experiencing weaker conditions this year despite the recovery in the national economy. This is the part that hurts states like Ohio and other Great Lakes states. In particular, autos and auto parts makers are coming off a period of strong sales and are cutting back this year. This also harms suppliers of steel and rubber, plastics and fabricated metals. However, vehicle manufacturers, particularly domestic companies, are desperately trying to stem the erosion in sales—off 2% through June, compared to a year ago—by stepping up incentives spending. This strategy is losing its effectiveness and vehicle manufacturers are losing money. As sales are expected to be flat through year end and manufacturers cannot risk reducing incentives, the industry will need to implement more cost-cutting measures to re-energize profits.

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