Semiannual Forecast: Demand Is a Drag On Sentiment

At first glance, Institute for Supply Management^®’s (ISM^®) Spring 2024 Semiannual Economic Forecast could be considered a mild disappointment — while production, capital expenditures, employment and revenues are expected to grow this year, the outlook is not nearly as rosy as it was five months ago.

But as is said for many things in life, economic data can grow on a person, as was suggested by Timothy R. Fiore, CPSM, C.P.M., Chair of the ISM Manufacturing Business Survey Committee, during a LinkedIn Live broadcast hosted by ISM on Wednesday.

While many of the performance metrics for the manufacturing and services sectors failed to meet December projections, they still indicated year-over-year growth, said Fiore and Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the ISM Services Business Survey Committee. And both noted the numbers reflected cooling economic performance that should encourage those watching the U.S. Federal Reserve (Fed) and interest rates.

“What we’re faced with is sluggish growth in the first (four months of the year),” Fiore told a conference call of reporters after the Forecast was released on Wednesday morning. “Based on the lack of demand, companies are holding back on investments — no need to do that when you’re not seeing the signs of a strong recovery period. It fits with the fact that this is going be a slow growth. We’ve had four months of activity that has not been overwhelming. I still believe that this is an expansion cycle, but it’s definitely weak.”

Based on responses from the Business Survey Committees that help compile the monthly ISM^® Report On Business^®, the Forecast reports recent sector performance provided by purchasing and supply executives on the front lines of the U.S. economy, as well as their sentiments for the rest of the year. A comprehensive prospectus is released in December, with a smaller update in May.

Though it did not factor into December Semiannual Economic Forecast sentiment because the news came after Business Survey Committee responses were collected, the Fed’s December 13 announcement that at least three rate cuts were possible in 2024 were a tailwind. But the key short-term interest rate remains at a 23-year high of 5.25 percent to 5.5 percent, and although Fed chair Jerome Powell has suggested the 2-percent inflation target “may take longer than expected,” a rate increase is unlikely.

“With the slow, incremental growth on the services side and the Fed trying to stave off inflation, they have held back on rate cuts,” Nieves said. “I think time will tell, but the fact that they’ve held steady and not increased rates is a positive.”

The tepid growth reflected in the Forecast was consistent with the ISM^® Report On Business^® data in the first four months of the year. After ending a 16-month streak in contraction territory in March, the Manufacturing PMI^® returned to a sub-50 percent reading in April. The Services PMI^® was in contraction in April for the first time in 16 months. Both sectors have faced sagging demand, employment challenges and prices growth, themes echoed in the Forecast.

While prices growth has been slower than projected in December, manufacturing respondents expect to pay 1.9 percent more for raw materials for the entire year, and services panelists anticipate a 2.3-percent increase.

The good news: Inflation for many commodities could be stabilizing. “Steel is starting to come down, natural gas is up a little bit, but oil prices have not gone crazy,” Fiore said. “Prices growth momentum seems to be abating.”

The not-so-good news: Those prices-growth figures are close to the revenue increases projected for 2024: 2.1 percent in manufacturing and 2.9 percent in services.

In December, manufacturing respondents projected a 5.6-percent revenue increase for this year, services 6.9 percent. Other measurements had similar drops: Capital expenditures, a good sign on companies’ economic confidence, are expected to increase 1 percent this year in manufacturing (down from an 11.9-percent forecast in December) and 1.4 percent in services (down from 2.9 percent).

“Services companies tend to regard capital expenditures not so much through availability and resources for obtaining products for capital improvements, but more about the expenditure,” Nieves said. “We see the same dynamic on labor: Right now, it’s better to control that expense. As the year progresses, we’ll see how some things settle with the election, geopolitical concerns and inflation. We’re seeing strategic cost management with industries across the board.”

As the business world turns, customers remain the fulcrum — even if prices growth continues to subside — amid interest-rate cuts evidently on hold and such stimuli as federal infrastructure spending just making their way into the system.

A special question asked panelists to gauge demand at their companies. In manufacturing, 51 percent selected “meets expectations,” 17 percent indicated “exceeds” and 32 percent reported demand below projections. In services, those figures are 62 percent, 15 percent and 23 percent, respectively.

“There doesn’t seem to be anything that will drive price structures up much more than where they are already,” Fiore said. “So, buyers and sellers have acknowledged that the second half of the year will not have arguments about additional costs.”

However, he added, “It’s all going to go back to demand, which is not showing up in any big way. Until it comes back to a relatively healthy level, you’re going to see this pensiveness.” ISM’s December 2024 Semiannual Economic Forecast figures to indicate if such hesitancy will be an anchor on projections for next year.

In other Forecast findings:

• The current operating rates are 82.8 percent of normal capacity in the manufacturing sector and 88.6 percent in services. The manufacturing figure is down 0.2 percentage point compared to December, which the services reading increased 2.1 points.
• Employment growth remains nearly flat-lined, with a 0.3-percent projected increase for 2024 in manufacturing and 0.8 percent in services.
• In another special question, 24 percent of manufacturing respondents expect supply chain performance in the fourth quarter to be better, 63 percent the same and 13 percent worse. In services, the figures are 17 percent, 72 percent and 11 percent, respectively.

(Photo credit: Getty Images/Lechatnoir)