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Philly Fed Firms: Manufacturing Activity Continues to Expand

Responses from manufacturing firms polled for the Federal Reserve Bank of Philadelphia's Business Outlook Survey suggest that regional manufacturing activity continued to expand in February. The survey's broad indicators for general activity, new orders, and shipments all increased from their readings in January. Firms reported near-steady employment levels but an increase in average work hours. More firms reported higher input prices this month, and a sizable share of firms reported price increases for their own manufactured goods. The survey's broad indicators of future activity fell from levels in recent months but continue to reflect optimism about future manufacturing growth.

Indicators Suggest Continued Expansion

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, edged higher from a reading 7.3 in January to 10.2, its highest reading since October.  The demand for manufactured goods also showed improvement this month: The new orders index was positive for the fifth consecutive month and increased from 6.9 to 11.7. The shipments index also remained positive and increased 9 points. The indexes for both delivery times and unfilled orders recorded slightly positive readings this month, compared with their negative readings in January.

Firms' responses suggest near-steady levels of employment this month. The current employment index, which has been positive for six consecutive months, fell from a reading of 11.6 in January to 1.1 this month, suggesting little overall growth in employment. The percentage of firms reporting an increase in employment (14 percent) was only slighter greater than the percentage reporting decreases (13 percent). Firms reporting a longer workweek (20 percent) outnumbered those reporting a shorter one (10 percent), and the current workweek index increased 5 points.

Input and Output Prices Edge Higher

Indexes for prices paid and prices received both increased this month. Forty-two percent of the firms reported higher prices for inputs this month, up from 35 percent last month. The prices paid index increased 7 points and has now edged higher for four consecutive months. On balance, firms also reported a rise in prices for manufactured goods: More firms reported increases in prices (22 percent) than reported decreases (7 percent). The prices received index increased 4 points, its fourth consecutive increase.

Firms' Outlook Still Optimistic

The future general activity index fell from a reading of 49.0 in January to 33.3 this month. The index, which has increased for five consecutive months, remains at a relatively high level. The indexes for future new orders and shipments paralleled the decline in the future activity index, decreasing 17 points and 19 points, respectively. The future employment index showed improvement, however, increasing 3 points. Firms expecting to increase employment over the next six months (33 percent) outnumbered those expecting to decrease it (11 percent).

Firms were asked about their 2012 capital spending plans. Nearly 36 percent of the firms indicated that total capital spending would be higher this year than in 2011; 23 percent indicated that spending would be lower. Firms that plan to increase capital spending noted that they expect to spend more on noncomputer equipment, software, and computer hardware, and they most frequently cited expected high sales growth, the need for replacement capital, and an improved cash flow or balance-sheet position as the reasons for their increased capital spending plans.

Summary

According to respondents to the February Business Outlook Survey, the region's manufacturing sector continued to grow this month. All of the broad indicators remained positive, with firms reporting a pickup in new orders and shipments. Price pressures were more widespread this month, and more firms also reported higher prices for their own goods. Firms' outlook and employment plans for the next six months remain generally optimistic.

For more information on this survey or to learn more about the manufacturing sector and LEAN, please contact the LEAN Accountants of McKonly and Asbury, LLP.

Blueprint for an America Built to Last – Business Highlights

President Obama recently laid out his Blueprint for an America Built to Last during the State of the Union address.  His plan contains several proposals that focus on the business sector that are intended to support domestic manufacturing and job creation, and to discourage moving operations overseas and outsourcing.  The following is a summary of the proposed reformed package as it pertains to businesses.

Remove tax deductions for shipping jobs overseas and provide new incentives for bringing jobs back to the U.S.

The tax code currently allows companies that move operations overseas to deduct the cost of their moving expenses, which in turn reduces the amount of tax that they pay in the U.S.  Under this proposal, moving deductions would be denied when a company transfers its operations to a foreign country.  On the other hand, if a company moves its operations back to the U.S. after being abroad, the proposal includes a 20 percent income tax credit for the expenses incurred in moving it back.

Target the domestic production incentive on manufacturers who create jobs here at home and double the deduction for advanced manufacturing.

This proposal looks at reforming the current domestic production activities deduction by more narrowly focusing it on manufacturing activities.  For example, it would no longer apply to oil production.  Savings would be invested in expanding the deduction for manufacturers and doubling the deduction from 9 percent to 18 percent for advanced manufacturing technologies.

Introduce a new Manufacturing Communities Tax Credit to encourage investments in communities affected by job loss.

A new credit is being proposed for qualified investments that help finance projects in communities that have been impacted by a major job loss event, such as a military base closure or a major employer closing or substantially reducing operations.  The credit will provide $2 billion per year in incentives for three years.

Provide temporary tax credits to drive domestic clean energy manufacturing.

The President is proposing to extend tax credits to drive investment in domestic clean energy manufacturing, ensuring new windmills and solar panels will incorporate parts that are produced and assembled in the U.S.

Extend 100 percent expensing of investment in plants and equipment.

100 percent bonus depreciation expensing expired at the end of 2011.  This proposal includes a provision to extend the increased deduction for all of 2012 for the cost of investments in qualifying property.

Close the loophole that allows companies to shift profits overseas.

Currently, there are loopholes in the tax system which allows corporations to shift profits overseas from intangible property created in the U.S.  The President’s plan proposes closing this loophole.

Make the Research and Experimentation Tax Credit permanent.

The research and experimentation tax credit has always been temporary in nature.  This proposal supports making the credit permanent, along with enhancing and simplifying it.

To learn more about the Blueprint for an America Built to Last, please contact the LEAN Accountants of McKonly and Asbury, LLP.

 

Year 2011 Manufacturing Technology Demand Strong Amid Other Economic Weakness

As initially reported by The Association for Manufacturing Technology (AMT) The most current U.S. manufacturing technology orders show 2011 at $4,529.11 million, which is up 80.5% compared with 2010 and is the second highest dollar amount in the last 15 years. As of October, manufacturing technology orders had already surpassed the total value accumulated in 2007.

The Midwest and Central regions of the U.S. have seen the greatest surge in manufacturing technology orders. The Midwest's manufacturing technology orders in 2011 are 105 percent more than the comparable figure for 2010. This large increase is the result of the region's large traditional customer base.

It is also where the oldest equipment resides and the industries impacted most by the weak dollar and reshoring trend are located. The Central region pick-up — 85 percent higher compared to 2010 — was powered by the growth in the energy business and secondly by the automotive industry.

Beyond manufacturing technology, overall U.S. manufacturing is robust. Despite the past several years trend of offshoring, the value of U.S. manufacturing output increased by one-third to $1.65 trillion between 1972 and the 2008 recession. Even though China accounted for 19.8 percent of global manufacturing value in 2010, the U.S. was strong with a share of 19.4 percent.  Exports are rising as American manufacturers meet overseas demand. Manufacturing technology from the U.S. is less expensive than foreign equipment, and U.S.-made goods are more price competitive than many imports due to the weak dollar.

The average age of machinery currently in use at U.S. manufacturing facilities crept up from nine years in 2007 to 13.5 years, and as demand started to increase the need for investment to replace the aging equipment became apparent. Those investments are being made in completely new technology. Multi-operation machines are profoundly impacting productivity. Water jet cutting and hydroforming are experiencing massive growth because they offer all the benefits of traditional processes but eliminate distortion and deformation. Additive manufacturing is growing, nano machining has become commercially affordable, and the availability of new materials, such as compact powdered metals, is having a tremendous impact. Plus, the emergence of cloud manufacturing, which promotes collaborative efforts across organizations, is opening new doors to manufacturers.

PNC Bank Reports December Economic Data Showing Continued Momentum

PNC Bank has reported that December economic data shows continued improvement in economic conditions in both the manufacturing and construction markets. More specifically, PNC's Economic Division is reporting the following:

 

• Manufacturing and Construction both expanded at the end of 2011
• Retail sales were up over the Holiday season
• Falling house prices remain a drag on growth
• The economy appears to be gathering steam heading into the New Year

To read the full report, click http://www.leanaccountants.com/ISM%20Manufacturing.pdf.

To learn more about LEAN, contact the LEAN Accountants of McKonly and Asbury, LLP.



Unstable Economy Remains Chief Concern for Manufacturers

While 66 percent of manufacturers expect to experience revenue growth in 2012, many say the recovering economy will remain a major hurdle to operations, according to a recent ASQ survey.

Nearly 1,600 manufacturing professionals from around the world responded to ASQ’s 2012 Manufacturing Outlook Survey, which was conducted online from Oct. 17 through Nov. 4. Respondents represent the aerospace, automotive, food, medical device, pharmaceutical and utility industries, among others.

According to the survey results, more than 70 percent of respondents say they experienced revenue growth in 2011. In ASQ’s 2011 Manufacturing Outlook Survey conducted in late 2010, 67 percent had hoped to experience revenue growth in 2011.

Despite the outlook regarding revenue, manufacturers continue to be wary of the global economy, citing the housing market and fears of a double-dip recession. Specifically, some respondents said:

• “Customers are scared to release purchase orders. They act differently because of the economy.”
• “Economic conditions are hurting people’s ability to purchase our products.”
• “The housing market is not recovering in a timely fashion.”

In addition to fears of the world economy, manufacturers say the lack of a qualified workforce is inhibiting their ability to grow.

According to the survey results, 44 percent of respondents say finding qualified applicants is the biggest hurdle to filling vacant positions, while 27 percent say budget is a biggest hurdle to filling open positions. Twenty-three percent claim time—and the lack thereof—is the biggest hiring hurdle.

Retiring employees pose minimal effect

Survey results show few manufacturers think their company will be adversely affected by retirements in 2012.

On a scale of one to 10, where one is “very unlikely” and 10 is “very likely,” nearly 68 percent of respondents said retirements were “unlikely” to affect their business, including 26 percent who said retirements were “very unlikely” to affect the organization. Only 9 percent said retirements were “very likely” to affect the business.

And when retirees leave, many businesses consider options about refilling the position. According to the survey:

• 54 percent of respondents consider the positions on a case-by-case basis
• 26 percent simply hire a new worker to replace the retiree
• 18 percent leave the position unfilled and delegate responsibilities to existing employees
• 2 percent completely dissolve the position and duties.

When new employees are hired to replace retirees, many companies rely on on-the-job training to help bring the new employee up to the production level of the outgoing retiree.

In fact, 87 percent of respondents say they use on-the-job training, while 5 percent say their business requires company-provided classroom training, and 2 percent said they use third-party training, like local colleges or other training providers. The remaining respondents say they use any combination of on-the-job training and classroom training.

“While many manufacturers are showing improvement and experiencing revenue growth, there remains clear hurdles facing these businesses,” said ASQ CEO Paul Borawski. “Even though companies say retiring baby boomers aren’t adversely affecting their businesses, finding qualified employees is still a concern—one that can affect businesses in this global economy—as retiring employees often leave with a wealth of knowledge not easily replaced.”

To learn more about this survey contact ASQ at www.asq.org . For up to date information on economic conditions and factors impacting manufacturers contact the LEAN accountants of McKonly and Asbury.

Over Half of Global Manufacturers Are Reshaping Their Supply Chain Models

Large global manufacturers are setting their sights on top-line growth over the next two years, focusing on new products, strategic acquisitions and alliances, innovation and increasing production capacity in high-growth markets. Bolstering the growth agenda are stronger investments in supply chain visibility and risk management to mitigate the impact of continued market volatility, according to KPMG's 2011 Global Manufacturing Outlook. The KPMG annual survey of 220 manufacturing executives from global companies with at least $1 billion in revenue shows that businesses will focus on top-line growth as a priority in the next two years, followed by research and development (R&D), customer relationships and cost containment. Almost 80 percent of respondents are cautiously optimistic over prospects for growth over the same period.

When asked to compare the primary focus areas of their growth strategies in the next two years with the two previous years, the survey revealed a marked shift in focus: 56 percent of manufacturers globally are planning to sell new products in new and existing markets over the next two years, up from 37 percent.

The US ranks as the top market for expected increase in demand, closely followed by China, then India, with Brazil and Germany rounding out the top five. Slightly more than half see emerging markets as key to their growth strategies.

Price volatility of raw materials and inputs remains the biggest challenge for 44 percent of executives, followed by increased competition and pricing pressure, and uncertain demand. This issue of volatility was seen as even more severe among Asian manufacturers at 54 percent. In the US, competition and pricing pressures were the chief concerns.

“Recent economic events in Europe and the US may have likely clouded manufacturers' optimism somewhat. However, the lessons learned from the economic uncertainty, political instability, and historic natural disasters of the past few years have taught companies that they can survive these challenges with lean agile operating structures, enhanced risk management practices, and a focus on innovation,” said Jeff Dobbs, KPMG's global head of Diversified Industrials and a partner in the US firm. “Today we're seeing that despite an increasing set of cost challenges, manufacturers are realigning their business models to prioritize top-line growth.” Grooming Supply Chains for Growth

NearShoring Strategy Will Boost U.S. Manufacturing Jobs

The phenomenon of NearShoring – the relocation of manufacturing production to countries that provide less expensive production processes and are closer to the end consumer – offers the potential for a mass return of jobs from China to the North American market and will get under way sooner rather than later, says a manufacturing sector economist.

”A new study from the Boston Consulting Group (BCG) posits that some 3 million jobs will return to the U.S. thanks to NearShoring,” says Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, Intl. (FMA).

In the current economic update newsletter Fabrinomics published by FMA, Kuehl reports the BCG study cites three factors expected to drive this process – the rising costs of production in China, the rising costs of transportation, and the improved efficiency and productivity in the U.S. and Europe.

“The first of these factors has become a major concern for the Chinese as there is no way to reverse that trend without creating some serious social unrest in China,” Kuehl says. “Wages and salaries have been going up fast in China – estimates are that wages have risen by more than 1,000 percent in the coastal regions just in the last year or so.

“The Chinese are losing the cheap manufacturing sector to rivals in other parts of Asia and to the Latin nations like Mexico, where wages have risen by less than 25 percent. The BCG study shows that costs of production in China are going to rise inexorably in the coming years.”

In terms of reduced transportation costs, Kuehl said it’s not just a matter of how much additional fuel is needed to ship goods from Asia to the markets in Europe and the U.S., though that is an expense that will keep rising as energy costs go up.

September U.S. Manufacturing Data Show No Signs of Demand Collapse

The slowdown in U.S. manufacturing activity that has been evident since early summer showed no signs of acceleration in September, providing some indication that business investment remains relatively resilient in the face of slowing global growth.

Fitch Ratings sees the Institute of Supply Management (ISM) Purchasing Managers index, which pointed to modest expansion in factory orders and production, as confirmation that U.S. manufacturers have as yet seen no across the board deterioration of demand conditions.

The broad-based factory index issued by the ISM today pointed to modest expansion of manufacturing activity in September, with production and employment indices both rising compared with August trends. More worrying from the standpoint of future demand were the modestly contractionary index readings for new orders and order backlog. The backlog index in September was the lowest reported since April 2009, in the depths of the recession.

Sectors reporting a contraction in new factory orders for the month included primary metals, paper products, transportation equipment and computer and electronic products. Global demand for semiconductors remains weak, while production and order trends in the automotive sector appear to be relatively healthy.

July Manufacturing Technology Orders, Manufacturing technology orders up 102.9% from 2010

July U.S. manufacturing technology orders totaled $506.97 million according to AMTDA, the American Machine Tool Distributors' Association, and AMT - The Association For Manufacturing Technology. This total, as reported by companies participating in the USMTO program, was up 7.3% from June and up 92.7% when compared with the total of $263.14 million reported for July 2010. With a year-to-date total of $2,975.10 million, 2011 is up 102.9% compared with 2010. These numbers and all data in this report are based on the totals of actual data reported by companies participating in the USMTO program.

“The manufacturing beat goes on! Machine tool sales continue to exceed forecasts for 2011,” said Peter Borden, AMTDA President. “The stock market's volatility and the traditional summer slowdowns as budgets are depleted were no match for the ongoing demand to get new machines into production as soon as possible. This pace will slow; but for USMTO 2011 so far, there are no signs of what we hear on the nightly news.”

The United States Manufacturing Technology Orders (USMTO) report, jointly compiled by the two trade associations representing the production and distribution of manufacturing technology, provides regional and national U.S. orders data of domestic and imported machine tools and related equipment. Analysis of manufacturing technology orders provides a reliable leading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity.

Manufacturing Technology Orders up 108.0% in 2011

May U.S. manufacturing technology orders totaled $388.27 million according to AMTDA, the American Machine Tool Distributors’ Association and AMT - The Association For Manufacturing Technology.  This total, as reported by companies participating in the USMTO program, was down 2.6% from April but up 121.3% when compared with the total of $175.46 million reported for May 2010.  With a year-to-date total of  $1,984.87 million, 2011 is up 108.0% compared with 2010.

These numbers and all data in this report are based on the totals of actual data reported by companies participating in the USMTO program.

“The May order numbers confirm our members’ reports of continued strong project levels by manufacturing companies to improve productivity in their factories,” said Peter Borden, AMTDA President. “The 2,000 unit-per-month level signifies a very healthy demand still in place as we head toward the close of the second quarter.”

The United States Manufacturing Technology Orders (USMTO) report, jointly compiled by the two trade associations representing the production and distribution of manufacturing technology, provides regional and national U.S. orders data of domestic and imported machine tools and related equipment. Analysis of manufacturing technology orders provides a reliable leading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity.