The supply chain economy continues to tread along, marked by the uncertainty that has lingered since the beginning of the year. And despite good news from the Institute for Supply Management last week, many executives remain cautious about the end-of-year outlook.
In its monthly Manufacturing Report on Business, ISM said its Purchasing Manager’s Index rose slightly in October—to 51.7 compared to 51.5 in September. A reading above 50 indicates growth in the sector, and October’s reading suggests the U.S. manufacturing economy is growing at a faster clip. ISM’s New Orders and Production Indices grew in October as well, with new orders growing for the third straight month and production returning to growth after two straight months of decline.
But two months of slight growth is not enough to convince business leaders that a turnaround is in sight, and most are planning to finish the year on a modest note. Analysts at the Manufacturers Alliance for Productivity and Innovation (MAPI) predict 2% growth in the U.S. manufacturing economy in the fourth quarter, a result they say should be higher based on pent-up demand for motor vehicles and housing, and capital spending projects that remain on hold.
“A potential capital spending boom is being held back by the uncertainty concerning the ‘fiscal cliff,’ the uncertainty about the severity of the recession in Europe, a lack of clarity on future business tax policy, and the lack of business confidence that policymakers can come up with a credible plan for federal deficit reduction,” MAPI chief economist Daniel J. Meckstroth said in analyzing the October PMI results.
Supply chain leaders agree. Looking at the distribution sector in particular, executives say it would be nice to start shipping the backlog of orders that have been growing over the last few months.
“Our backlog in general has been growing at a nice rate for the past couple of months—enough that it’s positive,” Allied Electric’s vice president of sales Mark Simon said in mid-October. “Our customers are deferring to their distribution partners to keep their materials on hold and send them as projects are beginning to fund.”
Simon added: “The PMI tells us the sector is moving in the right direction, but it’s not enough to hang your hat on … It’s a good sign, but it needs to trend that way for a few months.”
Similar sentiments prevailed at the recent Electronic Components Industry Association’s Executive Conference, a meeting of top distribution and manufacturing executives in the electronic components business. Michael Knight, senior vice president for the Americas with components distributor TTI, Inc., characterized 2012 as a year that is just “bumping along” for most electronics companies—unusual for the sector, with many companies predicting flat to slightly down sales for 2012.
Industry analyst Thomas Dinges of IHS said the industry outlook calls for slower growth ahead; Dinges said he did not anticipate another major recession as of late October.
“The industry will survive this; it will get better,” Dinges said, adding that 2013 will be a challenge too, with 2% economic growth expected in the U.S. on top of a continuing recession in Europe and slowing growth in China.
Dinges pointed to the long-term opportunities in the electronics sector as a key reason industry leaders should not despair. The growing amount of electronic content in just about every aspect of our lives combined with increasing demand for electronic devices worldwide are at the top of the list.
TTI’s Knight agreed, calling the industry a “very vibrant, very healthy” place to be.
“Look at health care. Look at the way wireless [technology] is changing our homes and offices,” Knight said in an interview at the close of ECIA’s conference in Chicago last week. “The electronic content in our lives seems pretty awesome now, but just look to science fiction—that’s where we’re going to be.”