Economic Growth Continues, Manufacturing Growth Expected In 2013

Economic growth in the United States will continue in 2013, according to purchasing and supply management executives in the December 2012 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 2013, with revenues expected to increase in 17 manufacturing industries, and the non-manufacturing sector predicts that 14 of its industries will see higher revenues. Capital expenditures, a major driver in the U.S. economy, are expected to increase by 7.6 percent in the manufacturing sector and by 7 percent in the non-manufacturing sector. Manufacturing, however, expects that its employment base will grow by less than 1 percent, while non-manufacturing expects employment growth of 1.3 percent.

These projections are part of the forecast issued by the Business Survey Committee of the Institute for Supply Management ™ (ISM). The forecast was released on December 12, 2012; it was compiled by Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee; and by Anthony S. Nieves, C.P.M., CFPM, chair of the ISM Non-Manufacturing Business Survey Committee.

Manufacturing Summary

Expectations for 2013 are positive, as 62 percent of survey respondents expect revenues to be greater in 2013 than in 2012. The panel of purchasing and supply executives expects a 4.6 percent net increase in overall revenues for 2013, compared to a 4 percent increase reported for 2012 over 2011 revenues.

The 17 manufacturing industries expecting revenue improvement over 2012 — listed in order — are: Primary Metals; Petroleum & Coal Products; Computer & Electronic Products; Wood Products; Furniture & Related Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Paper Products; Chemical Products; Plastics & Rubber Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Transportation Equipment; Machinery; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; and Fabricated Metal Products.

“Manufacturing purchasing and supply executives expect to see continued growth in 2013. They are optimistic about their overall business prospects for the first half of 2013, and are even more optimistic about the second half of 2013,” said Holcomb. “Manufacturing experienced five consecutive months of growth from January through May 2012, while four of the last six months from June through November 2012 registered slight contraction, but our forecast for 2013 calls for a resumption of growth in 2013. Respondents expect raw materials pricing pressures in 2013 to be higher than in 2012 and expect their margins will improve slightly.”

In the manufacturing sector, respondents report operating at 77.5 percent of their normal capacity, down from 81.6 percent reported in April 2012. Purchasing and supply executives predict that capital expenditures will increase by 7.6 percent in 2013 over 2012, compared to a 3.7 percent increase reported for 2012 over 2011. Survey respondents also forecast that they will increase inventories by 0.3 percent to support their planned level of sales in 2013. Manufacturers have an expectation that employment in the sector will increase by 0.8 percent in 2013, while labor and benefit costs are expected to increase an average of 1.7 percent. Manufacturing purchasers are predicting growth in exports and imports in 2013. Respondents also expect the U.S. dollar to strengthen on average against the currencies of major trading partners.

The panel also predicts the prices they pay for raw materials will increase 2.1 percent during the first four months of 2013, and will increase an additional 0.7 percent during the balance of the year, with an overall increase of 2.8 percent for 2013. This compares to a reported 0.8 percent increase in raw materials prices for 2012 compared with 2011.

Survey respondents report that the most challenging problems facing their businesses as they plan for 2013 are: poor sales (37.8 percent); government regulations (30.5 percent); inflation (9.8 percent); taxes (9.1 percent); quality of labor (4.9 percent); interest rates and finance (4.3 percent); and cost of labor (3.7 percent).

The panel also indicated that supply chain management practices will be improved in 2013 using the following strategies (listed in order): strategic sourcing/supply base rationalization; inventory management and control; process and information systems improvements; supplier performance management; and demand planning to reduce supply lead times.

Non-Manufacturing Summary

Fifty-nine percent of non-manufacturing supply management executives expect their 2013 revenues to be greater than in 2012. They currently expect a 4.3 percent net increase in overall revenues for 2013 compared to a 3.4 percent increase reported for 2012 over 2011 revenues.

The 14 non-manufacturing industries expecting revenue improvement in 2013 over 2012 — listed in order — are: Construction; Professional, Scientific & Technical Services; Other Services; Management of Companies & Support Services; Real Estate, Rental & Leasing; Wholesale Trade; Retail Trade; Transportation & Warehousing; Accommodation & Food Services; Arts, Entertainment & Recreation; Finance & Insurance; Information; Public Administration; and Health Care & Social Assistance.

“Non-manufacturing supply managers report operating at 85.4 percent of their normal capacity, slightly higher than the 85.2 percent reported in April 2012. They are optimistic about continued growth in the first half of 2013 compared to the second half of 2012, and they have a higher level of optimism about the next 12 months than they had last December for 2012,” said Nieves. “They forecast that their capacity to produce products and provide services will rise by 3.4 percent during 2013, and capital expenditures will increase by 7 percent from the 2012 levels. Non-manufacturers also predict their employment will increase by 1.3 percent during 2013.”

Respondents in non-manufacturing industries expect the prices they pay for materials and services will increase by 2.7 percent during 2013. They also forecast their overall labor and benefit costs will increase 1.9 percent in 2013. Profit margins are reported to have decreased in the second and third quarters of 2012, and respondents expect them to increase between now and April 2013.

Survey respondents report that the most challenging problems facing their businesses as they plan for 2013 are: government regulations (35.4 percent); poor sales (22.2 percent); cost of labor (10.4 percent); inflation (9 percent); interest rates and finance (9 percent); taxes (7.6 percent); and quality of labor (6.3 percent).

Survey respondents indicate that process improvement is the most frequently cited means of improving supply chains in 2013. Other improvement approaches include: strategic cost management; strategic sourcing; supplier relationship management; and professional development.

OPERATING RATE

Manufacturing
Manufacturing purchasing and supply executives report their companies are currently operating at 77.5 percent of normal capacity. This is a decrease when compared to April 2012 (81.6 percent) and December 2011 (79.2 percent). The November data from the Manufacturing ISM Report On Business ^® indicates the manufacturing sector is contracting for the fourth time in the last six months, while the first five months of 2012 indicated moderate expansion. The following nine industries — listed in order — are operating above the average rate of 77.5 percent: Paper Products; Wood Products; Nonmetallic Mineral Products; Machinery; Apparel, Leather & Allied Products; Chemical Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Computer & Electronic Products.

Non-Manufacturing
Non-manufacturing supply executives report their organizations are currently operating at 85.4 percent of normal capacity. This is slightly higher than the 85.2 percent reported both in April 2012 and in December 2011. Considering 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 utilization of capacity at a relatively high level. The nine industries — listed in order — are operating at or above the average capacity level of 85.4 percent: Educational Services; Real Estate, Rental & Leasing; Public Administration; Information; Arts, Entertainment & Recreation; Finance & Insurance; Transportation & Warehousing; Other Services; and Utilities.

PRODUCTION CAPACITY

Manufacturing
Production capacity in manufacturing increased 1.3 percent in 2012 as 36 percent of purchasing and supply executives reported an average capacity increase of 10.9 percent, 18 percent reported decreases averaging 15.5 percent, and 46 percent reported no change. This compares to a predicted increase of 5.2 percent for 2012 made in April 2012. Expectations for 2013 are for an increase of 6.8 percent. The nine industries reporting achieving an increase in production capacity in 2012 — listed in order — are: Machinery; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Primary Metals; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Furniture & Related Products; Plastics & Rubber Products; and Paper Products.

The principal means of achieving increases in production capacity in 2012 were (in order of importance):

1. Additional personnel (permanent, temporary or contract)
2. More hours worked with existing personnel
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 3.2 percent during 2012. This compares to the 1.1 percent increase reported in December 2011 for the year 2011, and is less than the prediction in April 2012 of a 3.3 percent increase for 2012. For 2013, an increase of 3.4 percent is predicted. For 2012, 35 percent of non-manufacturing supply managers indicate increases averaging 11.9 percent, and 7 percent of respondents indicate decreases averaging 14 percent. Fifty-eight percent see no change in their capacity. The 14 industries reporting increases in capacity in 2012 — listed in order — are: Information; Educational Services; Other Services; Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; Accommodation & Food Services; Wholesale Trade; Professional, Scientific & Technical Services; Transportation & Warehousing; Retail Trade; Construction; Public Administration; Health Care & Social Assistance; and Utilities.

The principal means of achieving increases in production capacity in 2012 were (in order of importance):

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

CAPITAL EXPENDITURES — 2012 vs. 2011

Manufacturing
Purchasing and supply managers report 2012 capital expenditures increased 3.7 percent on average when compared to 2011 levels. The actual expenditures for 2012 were significantly below survey respondents’ previous expectations, as they predicted an increase of 6.2 percent for 2012 in April 2012. The 37 percent of purchasers who reported increased capital expenditures in 2012 indicated an average increase of 26.1 percent, while the 20 percent who said their capital spending was reduced reported an average decrease of 30.6 percent. Forty-three percent of respondents said they spent the same in 2012 as in 2011. The nine industries showing increases in capital expenditures for 2012 — in order of percentage increase — are: Machinery; Food, Beverage & Tobacco Products; Fabricated Metal Products; Petroleum & Coal Products; Primary Metals; Plastics & Rubber Products; Apparel, Leather & Allied Products; Chemical Products; and Paper Products.

Non-Manufacturing
Non-manufacturing supply management executives report their level of capital expenditures in 2012 compared to 2011 increased 9.4 percent. This is greater than the 4 percent increase reported for 2011 one year ago, and is also greater than the 3.6 percent increase predicted by respondents in April 2012. Forty-one percent of respondents report increases averaging 30.6 percent. An additional 20 percent report decreases averaging 16.3 percent. Thirty-nine percent indicate they spent the same on capital expenditures in 2012 as in 2011. The 13 industries experiencing increases in capital expenditures in 2012 — listed in order — are: Accommodation & Food Services; Transportation & Warehousing; Educational Services; Agriculture, Forestry, Fishing & Hunting; Information; Health Care & Social Assistance; Wholesale Trade; Retail Trade; Mining; Finance & Insurance; Arts, Entertainment & Recreation; Public Administration; and Professional, Scientific & Technical Services.

PREDICTED CAPITAL EXPENDITURES — 2013 vs. 2012

Manufacturing
Purchasing and supply executives expect capital expenditures to increase 7.6 percent in 2013. The 41 percent of respondents who predict increased capital expenditures in 2013 indicate an average increase of 34.1 percent, while the 24 percent who said their capital spending would be reduced predict an average decrease of 25.9 percent. Thirty-five percent said they expect to spend the same in 2013 as in 2012. The 13 industries predicting increases in capital expenditures for 2013 — in order of percentage increase — are: Furniture & Related Products; Primary Metals; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Paper Products; Transportation Equipment; Machinery; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Fabricated Metal Products; Chemical Products; Plastics & Rubber Products; and Computer & Electronic Products.

Non-Manufacturing
Non-manufacturing purchasing and supply executives are expecting an increase of 7 percent in capital expenditures in 2013, less than the increase of 9.4 percent they are reporting for 2012. The 41 percent of respondents expecting to spend more on capital expenditures predict an average increase of 25.9 percent. An additional 21 percent anticipate a decrease averaging 16.8 percent. Thirty-eight percent expect to spend the same on capital expenditures in 2013 as in 2012. The 10 industries expecting increases in capital expenditures in 2013 — in order of percentage increase — are: Accommodation & Food Services; Real Estate, Rental & Leasing; Management of Companies & Support Services; Wholesale Trade; Agriculture, Forestry, Fishing & Hunting; Construction; Retail Trade; Public Administration; Other Services; and Transportation & Warehousing.

PRICES — Changes Between End of 2011 and End of 2012

Manufacturing
After an initial forecast in April 2012 of a 2.3 percent increase in prices paid for 2012, survey respondents now report realized price increases averaging 0.8 percent for the year. The 48 percent who say their prices are higher now than at the end of 2011 report an average increase of 5.3 percent, while the 30 percent who report lower prices averaged a 5.9 percent decrease. The remaining 22 percent indicate no change between the end of 2011 and the end of 2012. The 10 industries experiencing price increases — listed in order — are: Petroleum & Coal Products; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Wood Products; Chemical Products; Furniture & Related Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Machinery; and Transportation Equipment.

Non-Manufacturing
As 2012 draws to a close, non-manufacturing supply managers report prices they pay have increased by 2.7 percent over the entire year. This is slightly more than the 2.6 percent increase they predicted in April 2012, and slightly lower than the 2.8 percent increase reported one year ago for 2011. Fifty-six percent of purchasers report price increases averaging 5.6 percent. Ten percent of purchasers indicate decreased prices with an average reduction of 4.2 percent, and 34 percent of respondents have not experienced overall price changes this year. The 15 industries reporting price increases in 2012 — listed in order — are: Public Administration; Arts, Entertainment & Recreation; Accommodation & Food Services; Finance & Insurance; Retail Trade; Utilities; Wholesale Trade; Real Estate, Rental & Leasing; Health Care & Social Assistance; Transportation & Warehousing; Information; Management of Companies & Support Services; Construction; Educational Services; and Professional, Scientific & Technical Services.

PRICES – Predicted Changes Between End of 201 2 and April 201 3

Manufacturing
Fifty-seven percent of purchasing and supply managers expect the prices they pay to increase in early 2013 by an average of 4.4 percent. At the same time, 14 percent anticipate decreases averaging 2.8 percent. Including the 29 percent who expect no change in prices in the first four months of 2013, purchasers expect the net average overall price change to increase 2.1 percent for the first four months of 2013. The eight industries predicting increases in prices paid in the first part of 2013 higher than the 2.1 percent average — listed in order — are: Petroleum & Coal Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Fabricated Metal Products; Chemical Products; Furniture & Related Products; Plastics & Rubber Products; and Paper Products.

Non-Manufacturing
Non-manufacturing survey respondents predict their purchases in the first four months of 2013 will cost an average of 2.3 percent more than at the end of 2012. This is less than the 2.7 percent increase reported in the preceding section for all of 2012. Considering the prediction of a price change for all of 2013 (2.7 percent), purchasing and supply executives expect most of next year’s price increases to occur in the first part of next year. Sixty-seven percent of non-manufacturing respondents predict the prices they pay will increase an average of 3.9 percent in the first part of 2013. Five percent of respondents expect price decreases averaging 5.6 percent. The remaining 28 percent predict no change in prices in the first four months of 2013. The six industries predicting greater than or equal to the 2.3 percent average increase in prices they expect to pay in the first part of 2013 — in order of percentage increase — are: Accommodation & Food Services; Public Administration; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; Finance & Insurance; and Health Care & Social Assistance.

PRICES — Predicted Changes Between End of 201 2 and End of 201 3

Manufacturing
Respondents predict a net average increase in prices paid of 2.8 percent between December 2012 and December 2013, indicating they expect prices to increase an additional 0.7 percent during the period of May 2013 through December 2013. Sixty-three percent of respondents expect an average price increase of 5.4 percent for the full year of 2013, while 15 percent expect an average decline of 3.9 percent. The remaining 22 percent expect no change in their average prices paid for the year. The 10 industries expecting to receive above-average increases by the end of 2013 — listed in order — are: Petroleum & Coal Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Paper Products; Wood Products; Transportation Equipment; Chemical Products; Fabricated Metal Products; Plastics & Rubber Products; and Printing & Related Support Activities.

Non-Manufacturing
For all of 2013, non-manufacturing supply management executives expect their prices to increase an average of 2.7 percent. Seventy-one percent of respondents expect increases averaging 4.5 percent, 11 percent anticipate prices to drop an average of 4.7 percent, and 18 percent foresee no change in prices during the next year. The seven industries expecting greater than the 2.7 percent average price increase by the end of 2013 — in order of percentage increase — are: Accommodation & Food Services; Public Administration; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; Mining; Finance & Insurance; and Health Care & Social Assistance.

LABOR AND BENEFIT COSTS — Predicted Rate Change End of 2012 vs. End of 2013

Manufacturing
Purchasing and supply executives expect higher overall labor and benefit costs for 2013. Sixty-five percent of respondents expect increased labor and benefit costs and expect them to grow by an average of 3.4 percent for all of 2013, while the 5 percent forecasting lower costs see them decreasing by an average of 10.6 percent. Including the 30 percent of respondents who believe costs will remain the same, the expected overall net rate of increase is 1.7 percent between the end of 2012 and the end of 2013. The 13 industries expecting to pay an increase of 1.7 percent or higher — in order of percentage increase — are: Nonmetallic Mineral Products; Miscellaneous Manufacturing; Apparel, Leather & Allied Products; Machinery; Chemical Products; Electrical Equipment, Appliances & Components; Primary Metals; Paper Products; Petroleum & Coal Products; Wood Products; Computer & Electronic Products; Plastics & Rubber Products; and Printing & Related Support Activities.

Non-Manufacturing
Purchasing and supply executives expect a 1.9 percent increase in labor and benefit costs for non-manufacturing industries in 2013. Sixty percent of respondents expect such costs to increase by an average of 3.8 percent. Another 6 percent of respondents expect labor and benefit costs to shrink by an average of 5.3 percent, and 34 percent believe costs will remain stable during 2013. The 10 industries expecting to pay an increase of 1.9 percent or higher — in order of percentage increase — are: Accommodation & Food Services; Retail Trade; Information; Construction; Wholesale Trade; Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Utilities; Public Administration; and Finance & Insurance.

EMPLOYMENT

Change in Overall Employment

Manufacturing
ISM’s Manufacturing Business Survey Committee members report that manufacturing employment decreased 0.7 percent since April 2012, and forecast that employment will increase, on average, 0.8 percent for the full year of 2013. Thirty percent of respondents expect employment to be 7.8 percent higher in 2013, while 20 percent predict employment to be lower by 8 percent. The remaining 50 percent of respondents expect their employment levels to be unchanged in 2013. The 11 industries predicting increases in employment in 2013 — listed in order — are: Petroleum & Coal Products; Fabricated Metal Products; Plastics & Rubber Products; Primary Metals; Chemical Products; Computer & Electronic Products; Machinery; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Furniture & Related Products; and Paper Products.

Non-Manufacturing
ISM’s Non-Manufacturing Business Survey Committee members report that non-manufacturing employment has increased slightly (0.3 percent) since April 2012. Looking ahead to 2013, they forecast that employment will increase 1.3 percent by the end of 2013. For 2013, 34 percent of respondents expect higher levels of employment, 15 percent anticipate lower levels, and 51 percent expect their employment levels to be unchanged. The 11 industries anticipating increases in their employment in 2013 — listed in order — are: Arts, Entertainment & Recreation; Professional, Scientific & Technical Services; Management of Companies & Support Services; Construction; Transportation & Warehousing; Other Services; Retail Trade; Wholesale Trade; Public Administration; Real Estate, Rental & Leasing; and Accommodation & Food Services.

Note: A diffusion index above 50 percent would generally indicate an expectation of higher employment; below 50 percent, an expectation of lower employment.

EXPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2013)

Manufacturing
The responses for this semiannual report indicate purchasers see increases in new export orders for the first half of 2013. This contrasts with the most recent ISM New Export Orders Index data in the monthly Manufacturing ISM Report On Business ^®, which has shown export orders contracting for the last six months, from June through November 2012. Of the 81 percent of respondents who export, 49 percent predict an increase (44.1 percent moderate and 4.4 percent substantial) over the next half year. Sixteen percent of respondents (14 percent moderate and 2 percent substantial) predict a decrease in their exports, and 35 percent anticipate no change in exports over the next half year. The 12 industries expecting growth in exports during the first half of 2013 — listed in order — are: Furniture & Related Products; Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Printing & Related Support Activities; Primary Metals; Fabricated Metal Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Miscellaneous Manufacturing; Transportation Equipment; Chemical Products; and Electrical Equipment, Appliances & Components.

Non-Manufacturing
For the first half of 2013, non-manufacturing supply managers who report that their organizations engage in exporting feel less optimistic than they did one year ago concerning their export business. Of the 22 percent of non-manufacturing business survey respondents who report that they export, 29 percent predict an increase (26 percent moderate and 3 percent substantial) over the next half year. Ten percent of the respondents expect a decrease in their exports (10 percent moderate and 0 percent substantial), and 61 percent anticipate no change in exports over the next half year. Of the industries that report they export, the following seven industries expect growth in export business in the first half of 2013: Mining; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Retail Trade; Transportation & Warehousing; Other Services; and Wholesale Trade.

IMPORT BUSINESS — Predicted Change for Next Half Year (First Half of 2013)

Manufacturing
Purchasers expect increases in imports in the first half of 2013. Of the 85 percent of purchasers who reported they import, 33 percent predict an increase in their imports over the next half year (28.9 percent moderate and 3.5 percent substantial), while 16 percent predict a decrease in imports of materials (15.5 percent moderate and 0.7 percent substantial). About half of survey respondents (51 percent) expect no change in imports. The 11 industries expecting growth in imports — listed in order — are: Petroleum & Coal Products; Wood Products; Furniture & Related Products; Printing & Related Support Activities; Transportation Equipment; Fabricated Metal Products; Machinery; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Chemical Products; and Computer & Electronic Products.

Non-Manufacturing
Non-manufacturers have lower expectations for the use of imports for the first half of 2013 than they did in December 2011 for the first half of 2012. Of the 45 percent of non-manufacturing organizations who reported they import, 35 percent (33 percent moderate and 2 percent substantial) predict an increase in their imports during the first half of 2013. Seven percent of the respondents (6 percent moderate and 1 percent substantial) predict a decrease in imports of materials and services. The remaining 58 percent of purchasers expect no change in imports over the next half year. The 10 industries expecting growth in imports — listed in order — are: Retail Trade; Management of Companies & Support Services; Public Administration; Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; Transportation & Warehousing; Utilities; Wholesale Trade; Construction; and Professional, Scientific & Technical Services.

BUSINESS REVENUES

Business Revenues Comparison — 2012 vs. 2011

Manufacturing
Summarizing revenues for 2012, 54 percent of respondents say revenue was better than 2011, and that nominal (before adjusting for inflation) revenues increased an average of 11.4 percent over 2011. Conversely, 20 percent say their nominal revenues decreased in 2012 by an average of 10.8 percent, and the remaining 26 percent indicate no change. Overall, purchasing and supply executives indicate a net nominal increase of 4 percent in business revenues for 2012 over 2011. This is less than the 4.5 percent increase that was forecast in April 2012 for all of 2012, and also less than the 5.5 percent increase predicted in December 2011 for all of 2012. The 14 industries reporting increases (highest to lowest) in revenues in 2012 are: Printing & Related Support Activities; Wood Products; Fabricated Metal Products; Machinery; Miscellaneous Manufacturing; Paper Products; Primary Metals; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Chemical Products; Furniture & Related Products; Nonmetallic Mineral Products; Apparel, Leather & Allied Products; and Electrical Equipment, Appliances & Components.

Non-Manufacturing
Non-manufacturing supply management executives report that business revenues for 2012 have increased over 2011 by 3.4 percent. This is less than the 4.8 percent increase predicted in April 2012 for all of 2012. The 55 percent of respondents reporting better business in 2012 than in 2011 estimate an average nominal (before adjusting for inflation) revenue increase of 9.6 percent. This is in contrast to an average nominal decrease of 9.8 percent reported by the 18 percent of respondents who indicate worse business in 2012. The remaining 27 percent have experienced no change in 2012 from 2011. The 13 industries reporting increases in revenues in 2012 — listed in order — are: Other Services; Accommodation & Food Services; Professional, Scientific & Technical Services; Real Estate, Rental & Leasing; Wholesale Trade; Information; Retail Trade; Transportation & Warehousing; Finance & Insurance; Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Public Administration; and Construction.

Business Revenues Prediction for 2013

Manufacturing
Manufacturing survey respondents forecast that business revenues for 2013 will be stronger than in 2012. The 62 percent of respondents forecasting better business revenues in 2013 than in 2012 estimate an average nominal (before adjusting for inflation) increase of 9.7 percent in their organizations’ revenues. This is in contrast to an average nominal decrease of 11.3 percent forecast by the 12 percent who predict worse business revenues in 2013. Including the 26 percent who see no change in 2013, the forecast for overall net nominal increase in business revenues for 2013 over 2012 is 4.6 percent. The following 17 manufacturing industries expecting revenue improvement over 2012 — listed in order — are: Primary Metals; Petroleum & Coal Products; Computer & Electronic Products; Wood Products; Furniture & Related Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Paper Products; Chemical Products; Plastics & Rubber Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Transportation Equipment; Machinery; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; and Fabricated Metal Products.

Non-Manufacturing
Non-manufacturing survey respondents forecast that business revenues for 2013 will be improved over 2012 by an average of 4.3 percent. This is more than the 3.4 percent increase reported for 2012, and also more than the 1.5 percent increase reported one year ago for 2011 revenues over 2010 revenues. The 59 percent of respondents forecasting better business in 2013 than in 2012 estimate an average nominal (before adjusting for inflation) revenue increase of 8.4 percent. This is in contrast to an average nominal decrease of 7.1 percent forecast by the 10 percent who predict worse business in 2013. The remaining 31 percent see no change in 2013. The 14 industries expecting increases in revenues in 2013 — in order of percentage increase — are: Construction; Professional, Scientific & Technical Services; Other Services; Management of Companies & Support Services; Real Estate, Rental & Leasing; Wholesale Trade; Retail Trade; Transportation & Warehousing; Accommodation & Food Services; Arts, Entertainment & Recreation; Finance & Insurance; Information; Public Administration; and Health Care & Social Assistance.

PROFIT MARGINS

Manufacturing
Survey respondents report that profit margins increased on average during the second and third quarters of 2012, as 34 percent experienced an increase in profit margins, 26 percent had lower margins, and 40 percent reported no change. Overall, expectations are about the same between now and April 2013 as 28 percent of respondents forecast better profit margins, 22 percent predict lower profit margins, and 50 percent predict no change.

Non-Manufacturing
Non-manufacturing supply management executives were asked about changes in profit margins their organizations recently experienced and are expecting in the near future. Their responses indicate that 21 percent experienced an increase in profit margins during the second and third quarters of 2012, while 35 percent found smaller profit margins, and 44 percent had no change in margins during the same period. Looking ahead from now through April 2013, 28 percent of supply managers expect improved profit margins, 19 percent expect lower profit margins, and the remaining 53 percent of respondents anticipate no change in their profit margins.

BUSINESS COMPARISON

The First Half of 2013 with Last Half of 2012

Manufacturing
Looking ahead to the first half of 2013, survey respondents are optimistic about the next half year as reflected in a diffusion index of 59 percent. Comparing their outlook for the first half of 2013 to the last half of 2012, 40 percent predict it will be better, 22 percent predict it will be worse, and 38 percent expect no change. The 10 industries expecting improvement in the first half of 2013 — listed in order — are: Primary Metals; Food, Beverage & Tobacco Products; Furniture & Related Products; Plastics & Rubber Products; Petroleum & Coal Products; Apparel, Leather & Allied Products; Chemical Products; Transportation Equipment; Electrical Equipment, Appliances & Components; and Miscellaneous Manufacturing.

Non-Manufacturing
The first half of 2013 is predicted to be stronger than the last half of 2012, according to non-manufacturing purchasing and supply managers. The diffusion index indicating current expectations is 63.5 percent. Forty-three percent of respondents expect the first half of next year to be better than the last half of this year, 16 percent anticipate it will be worse, and 41 percent predict no change. The 13 industries expecting improvement in the first half of 2013 — listed in order — are: Construction; Transportation & Warehousing; Retail Trade; Accommodation & Food Services; Other Services; Professional, Scientific & Technical Services; Public Administration; Arts, Entertainment & Recreation; Management of Companies & Support Services; Finance & Insurance; Information; Wholesale Trade; and Health Care & Social Assistance.

Note: A diffusion index above 50 percent would generally indicate an expectation of the first half of the coming year being better than the second half of the current year.

The Second Half of 2013 with the First Half of 2013

Manufacturing
Purchasing and supply executives are even more optimistic about the second half of 2013 compared to the first half of next year. The percentage of survey respondents who forecast the second half of 2013 to be better than the first half is 46 percent, while 10 percent expect it to be worse, and 44 percent expect no change. The diffusion index for the second half of 2013 is 68 percent, compared to 59 percent for the first half of 2013. The 13 industries predicting improvement in the second half of 2013 — listed in order — are: Furniture & Related Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Plastics & Rubber Products; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Chemical Products; Computer & Electronic Products; Paper Products; Apparel, Leather & Allied Products; Primary Metals; and Transportation Equipment.

Non-Manufacturing
Comparing the second half of 2013 to the first half, non-manufacturing purchasing and supply executives feel more optimistic than they do for the first half of the year compared to the last half of 2012 (diffusion index of 66 percent for the second half compared to 63.5 percent for the first half). The percentage of respondents who currently forecast the second half of 2013 to be better than the first half is 42 percent, while 10 percent expect it to be worse. An additional 48 percent of purchasers expect no change. The 14 industries expecting improvement in the second half of the year — listed in order — are: Construction; Retail Trade; Information; Transportation & Warehousing; Management of Companies & Support Services; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; Finance & Insurance; Arts, Entertainment & Recreation; Public Administration; Real Estate, Rental & Leasing; Accommodation & Food Services; Other Services; and Professional, Scientific & Technical Services.

Note: A diffusion index above 50 percent would generally indicate an expectation of the second half of the coming year being better than the first half.

SPECIAL QUESTION: MOST IMPORTANT PROBLEMS FACING BUSINESS IN 201 3

Manufacturing
In response to a special question regarding the single most important problem their businesses face in planning for 2013, manufacturing respondents indicated the following:

• Poor sales (37.8%)
• Government regulations (30.5%)
• Inflation (9.8%)
• Taxes (9.1%)
• Quality of labor (4.9%)
• Interest rates and finance (4.3%)
• Cost of labor (3.7%).

Non-Manufacturing
In response to a special question regarding the single most important problem their businesses face in planning for 2013, non-manufacturing respondents indicated the following:

• Government regulations (35.4%)
• Poor sales (22.2%)
• Cost of labor (10.4%)
• Inflation (9%)
• Interest rates and finance (9%)
• Taxes (7.6%)
• Quality of labor (6.3%).

SPECIAL QUESTION: SUPPLY CHAIN IMPROVEMENTS IN 201 3

Manufacturing
We asked a second special question about what supply chain improvements respondents plan to make in 2013. Seventy percent stated they plan to take steps during the coming year to improve their supply chain management practices. The five most frequently cited approaches are listed below:

• Strategic sourcing/supply base rationalization
• Inventory management and control
• Process and information systems improvements
• Supplier performance management
• Demand planning to reduce supply lead times.

Non-Manufacturing
Responding to the special question regarding supply chain improvements in 2013, 61 percent of non-manufacturing respondents stated that they plan to take steps during the coming year to improve their supply chain management practices. The five most frequently cited approaches are listed below:

• Strategic cost management
• Process improvement
• Strategic sourcing
• Supplier relationship management
• Professional development.

INVENTORY-TO-SALES RATIO

Manufacturing
Purchasers will be increasing inventory on hand, by an average of 0.3 percent, to support their planned level of sales during 2013. In this forecast, 19 percent expect to increase their purchased inventory-to-sales ratio during 2013. This is in contrast to 21 percent who expect the ratio to decrease, and 60 percent who predict no change. The diffusion index of 49 percent indicates the inventory-to-sales ratio for 2013 will be very similar to what was predicted for 2012.

Non-Manufacturing
Of the 70 percent of non-manufacturing purchasers who answered this question, 12 percent anticipate increasing their purchased inventory-to-sales ratio during 2013. An additional 9 percent expect their ratio to drop, and 79 percent see no change. The diffusion index of 51.5 percent suggests the inventory-to-sales ratio will grow in 2013 by an average of 0.9 percent.

Note: A diffusion index above 50 percent would indicate an increase in the inventory-to-sales ratio; below 50 percent, a decrease in the ratio.

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing
Survey respondents are somewhat less optimistic about the outlook for 2013, when compared to the outlook for 2012 they predicted in December 2011. The 42 percent who report a better outlook is less than the 46 percent response received in December 2011. The resulting diffusion index for the outlook for 2013 is 61 percent, compared with 65 percent from one year ago when looking forward to 2012.

Non-Manufacturing
Non-manufacturing survey respondents are slightly less optimistic on their outlook now compared to when they looked ahead in December 2011. The 47 percent who currently report a better outlook is more than the 44 percent who had that outlook in December 2011. Thirty-one percent expect no change, and 22 percent feel the outlook will be worse over the next 12 months.

U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2013 — Manufacturing Only

Manufacturing
Purchasing and supply executives are expecting the U.S. dollar will strengthen against the average of foreign currencies listed below in 2013. The average diffusion index for this forecast is 53.3 percent, an increase of 4.1 percent from the December 2011 forecast average of 49.2 percent for 2012. The U.S. dollar is expected to strengthen against five of the major currencies and weaken against two of the major currencies listed.

Note: A diffusion index above 50 percent would predict a generally stronger U.S. dollar; below 50 percent, a generally weaker U.S. dollar, with the distance from 50 percent indicative of the predicted strength or weakness.

SUMMARY

Manufacturing
The manufacturing sector is currently expanding, and the forecast indicates that it will continue to expand in the first half of 2013, and at a faster rate in the second half of 2013.

• Operating rate is currently at 77.5 percent.
• Production capacity increased by 1.3 percent in 2012.
• Production capacity is expected to increase by 6.8 percent in 2013.
• Capital expenditures increased 3.7 percent in 2012.
• Capital expenditures are expected to increase 7.6 percent in 2013.
• Prices paid increased 0.8 percent in 2012.
• Overall 2013 prices paid are expected to increase 2.8 percent.
• Labor and benefit costs are expected to increase 1.7 percent in 2013.
• Manufacturing employment is expected to increase 0.8 percent in 2013.
• Expect growth in U.S. exports in 2013.
• Expect growth in U.S. imports in 2013.
• Manufacturing revenues (nominal) are up 4 percent in 2012.
• Manufacturing revenues (nominal) are expected to increase 4.6 percent in 2013.
• The U.S. dollar is expected to strengthen on average versus major trading partner currencies in 2013.
• Overall attitude of manufacturing supply managers: optimistic, with 80 percent of respondents predicting 2013 will be the same as or better than 2012.

Non-Manufacturing
The non-manufacturing sector continues to expand, and the forecast indicates an increased rate of expansion in 2013.

• Operating rate is currently at 85.4 percent.
• Production capacity increased 3.2 percent in 2012.
• Production and provision capacity is expected to increase 3.4 percent in 2013.
• Capital expenditures increased 9.4 percent in 2012.
• Capital expenditures are expected to increase 7 percent in 2013.
• Prices paid increased 2.7 percent in 2012.
• Prices paid are expected to increase 2.7 percent in 2013.
• Labor and benefit costs are expected to increase 1.9 percent in 2013.
• Non-manufacturing employment is expected to increase 1.3 percent in 2013.
• Expect export levels to increase in 2013.
• Expect import growth in 2013.
• Non-manufacturing revenues (nominal) are up 3.4 percent in 2012.
• Non-manufacturing revenues (nominal) are expected to rise 4.3 percent in 2013.
• Overall attitude of non-manufacturing supply managers: mostly positive outlook, with 78 percent of respondents predicting 2013 will be the same as or better than 2012.

*Miscellaneous Manufacturing includes items such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies.

**Other Services include services such as equipment and machinery repairing; promoting or administering religious activities; grant making; advocacy; and providing dry-cleaning and laundry services, personal care services, death care services, pet care services, photofinishing services, temporary parking services, and dating services.