ISM Supply Chain Planning Forecast: Cautious Optimism

While much economic sentiment since the U.S. elections has been positive due to an incoming administration and Congressional majorities that are expected to be business friendly, the optimism indicated by the ISM Supply Chain Planning Forecast was more cautious.

The Forecast, released on Monday, is based on responses from the Institute for Supply Management^® Manufacturing and Services Business Survey panelists that help compile the monthly ISM^® Report On Business^®. Formerly known as the Semiannual Economic Forecast, it reports recent sector performance provided by purchasing and supply executives on the front lines of the U.S. economy, as well as their expectations for the coming year.

Respondents in both sectors expect growth throughout the year, with the expansion pace accelerating in the second half in manufacturing and sustaining in services. Revenues are projected to increase 4.2 percent in manufacturing and 3.9 percent in services, which would be an improvement over figures reported for this year: 0.8 percent and 3.7 percent, respectively.

Panelists also expect the U.S. economy to keep growing in 2025. So, it’s bullish, but …

“I was surprised it wasn’t stronger,” says Timothy R. Fiore, CPSM, C.P.M., Chair of the ISM Manufacturing Business Survey Committee. “It looks like there’s still caution out there, which we should be mindful of as we go through the first quarter. This was probably not an easy forecast to compile because there are still a few unknowns.”

Perhaps the biggest unknown is inflation, and the impact on it from potential policies of the incoming Trump administration, especially on tariffs.

Manufacturing respondents reported that their prices paid increased by 3 percent in 2024, and they project 3-percent growth next year. “Inflation is still lurking out there,” Fiore says. “It’s clear that we’re still going to be dealing with it in 2025.”

In services, prices were up 5.2 percent this year, with a 5.3 percent increase expected in 2025. That both sectors expect growth in prices to be flat was one of the biggest surprises for Steve Miller, CPSM, CSCP, Chair of the ISM Services Business Survey Committee.

Throughout the presidential campaign and transition, Trump has threatened duties of as much as 20 percent on all imports, 25-percent tariffs on those from Canada and Mexico and at least a 60-percent tax on Chinese products.

“It seems like they are not pricing in any impact from tariffs,” he says. “Business tax rates were reduced in the first Trump administration, so maybe some optimism is baked in.”

The overall Forecast findings, Miller says, were in line with recent composite PMI^® readings for the ISM^® Report On Business^®, for Manufacturing and Services. The Manufacturing PMI^® for November was 48.4 percent, in contraction for the eighth straight month and 24 out of 25 months; the Services PMI^® of 52.1 percent indicated a fifth consecutive month in expansion.

“That 3.9-percent revenue growth projection is consistent with where the Services PMI^® is,” Miller says. “It’s not huge growth. It’s reasonable growth.”

Despite the lengthy contraction period for manufacturing, it hasn’t been as severe as previous downturns. In recent months, Fiore has expressed confidence that the sector could be in expansion soon, and panelists echoed that optimism.

Regarding optimism that 2025 will be better than this year, 38 percent of respondents responded yes, while 45 percent believe conditions will be the same — resulting in a diffusion index of 60.2 percent, up from 56.5 percent a year ago. That confidence is belied by projected increases in production capacity (by 4 percent) and capital expenditures (5.2 percent). For the second half of the year, the outlook diffusion index for manufacturing is 70.3 percent.

“That’s a strong indicator that the community is feeling good about 2025 compared to 2024,” Fiore says. “The number for the second half expresses confidence that things are going to take off in the first half and continue all the way through. So, that’s really positive.”

The services outlook diffusion indexes register 64 percent (with 37 percent of respondents expecting improvement and 53 percent no change) for the first half of 2025 and 66.7 percent for the second half. For the entire year, production and provision capacity is expected to increase 2.8 percent and capital expenditures are projected to rise 5.1 percent.

Regarding profit margins, 30 percent of manufacturing panelists project increases for their companies in through May, and 51 percent expect no change. In services, 36 percent expect profit margin increases during the first five months of 2025, and 45 percent no change.

That caught Miller’s attention: “If services revenue is projected to go up by 3.9 percent, capital expenditures by 5.1 percent and prices paid by 5.3 percent, and (a plurality) expect no change in profit margin, something’s got to give,” he says. “So, the numbers and expectations are positive. But if you look at that alignment, there seems to be a gap, and the only place I can think of it coming from is labor.”

In both the manufacturing and services sectors, the projected employment increase for the year is modest: 0.8 percent. Interestingly, services companies might finally be getting relief on employment challenges, as 42 percent of respondents reported hiring difficulty, down from 75 percent a year ago and 84 percent in 2022.

Fiore says the nature of projecting means it’s not unusual to find inconsistencies in the Forecast numbers, especially during a transition of power in the U.S. “I’ve done this so many times to know that the data doesn’t always tie together,” he says. “With the unknowns, that’s the message for the coming year. But the outlook is strong.”

In other Forecast findings:

• Current operating rates are 82.3 percent of normal capacity in the manufacturing sector (down from 83 percent in 2023) and 87.4 percent in services (an increase from 86.5 percent). A reading above 85 percent typically indicates a high level of performance.
• Fifty-six percent of manufacturing respondents report their companies are able to pass price increases to customers, down from 69 percent a year ago and 72 percent in 2022. In services, 58 percent reported an ability to pass increases, down from 64 percent in 2023 but up from 48 percent two years ago.
• In a special question, 56 percent of manufacturing respondents and 65 percent in services indicated their companies are not reshoring from China. Nearly a fourth (23 percent) of manufacturing panelists and 14 percent in services reported their organizations are shifting to domestic production.

The next ISM Supply Chain Planning Forecast will be released in May.

(Photo credit: Getty Images/Michael Milan)