Semiannual Forecast: Bullish Outlook Already Justified

December 15, 2023
By Dan Zeiger

It’s rare that elements of a business prospectus come to fruition before the report is even released, but Institute for Supply Management®’s (ISM®) December 2023 Semiannual Economic Forecast fit that bill.

The Forecast, released on Friday, is based on responses from the Manufacturing and Services Business Survey Committees that help compile the monthly ISM® Report On Business®. It 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 coming year.

In many ways, it is bullish, particularly for a manufacturing sector that has been in contraction for 13 months. Most important, the responses and data were compiled before the U.S. Federal Reserve’s (Fed) announcement earlier this week that interest rates will remain steady, with three cuts likely in 2024, eliciting sentiment in boardrooms and markets that the “soft landing” of slowing inflation while avoiding a recession has happened, or at least the runway is in sight.

“All of this was done before there was any indication of what would happen on interest rates,” Timothy R. Fiore, CPSM, C.P.M., Chair of the ISM Manufacturing Business Survey Committee, told a conference call of reporters on Friday. “So, these are numbers based on companies’ business planning. They saw things out there, possibly even before others did, and we’ve got confirmation that things are going to be better in 2024.”

Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the ISM Services Business Survey Committee, said after the release of the Services PMI® data for November that panelists commented that they feel it’s time for the Fed to loosen monetary policy. “It’s affected, most notably, Real Estate, Rental & Leasing, the largest industry contributor to the GDP,” he said. “It will be interesting to see if (rate cuts) have a positive impact on revenues, but it might take time to get that traction.”

Added Fiore, “I was surprised by the (Fed’s announcement). What a Christmas gift.”

At this time last year, the Semiannual Economic Forecast for 2023 was, as Fiore put it, “not super dramatic” — as in stable, a positive amid festering economic uncertainty. That projection, he added on Friday, was largely accurate: The Manufacturing PMI® has been in contraction territory but not volatile, staying between 46 percent and 49 percent. That has helped put the manufacturing sector in position to return to expansion next year.

Regarding optimism that 2024 will be better than this year, 34 percent of respondents responded yes, and 46 percent believe conditions will be the same — resulting in a diffusion index of 56.5 percent, up from 50 percent a year ago. That confidence is belied by projected increases in production capacity (by 7.8 percent), capital expenditures (11.9 percent) and revenues (5.6 percent).

Production capacity was up 0.3 percent in manufacturing in 2023, and Fiore noted the projected increase next year is the largest since before the coronavirus pandemic. The expected boost in capital expenditures (though down from the 14.9 percent increase this year) is a sign of companies’ economic confidence, he added.

“It looks like the worst of the manufacturing difficulties are likely behind us or soon to be behind us, and we’re entering a growth profile in 2024 that is a lot better than what we saw in 2023,” Fiore said. “The other encouraging thing is that the second half of 2024 is expected to be better than the first half, and the first half will be better than the second half of this year.”

In the services sector, which expanded for the 11th consecutive month in November, respondents expect business to be slightly worse in the first half of 2024, though they expect robust growth in the second half. A third (33 percent) of sector panelists expect next year to be better and 44 percent the same, for a diffusion index of 55.3 percent, down slightly from the 55.6 percent a year ago.

Production capacity is projected to increase 4.1 percent in 2024, after a 3.9 percent improvement this year. Capital expenditures are expected to be up 2.9 percent, following a 4.9-percent rise in 2023. Perhaps the most encouraging reading is revenues, which increased 4.2 percent this year and are projected to rise 6.9 percent in 2024.

“Looking at the year-over-year comparisons, 2023 was a stable and consistent year, with a slight pullback coming in the first half of 2024,” Nieves said. “Overall, our respondents expect the year to finish strong, and (profit) margins look fine. Conditions should remain stable in the services sector.”

After a year in which labor flexed muscles to win wage and benefits gains, employment — and its costs — are expected to increase in both sectors in 2024. In manufacturing, employment is projected to grow 2 percent, with labor and benefit costs rising 5.2 percent. In services, those figures are 0.8 percent and 3.3 percent, respectively.

The good news for most companies is that the labor and benefit costs, Fiore said, “are already baked in based on the negotiations and developments, where labor has had the strong hand.” He added, “Companies will have to figure out how to (protect) their profit margins, either by passing on price increases or increasing productivity. I think it will be more of the latter.”

Services continues to be most stung by labor shortages, as 75 percent of panelists in that sector have had difficulty hiring workers to fill open positions, compared to 59 percent in manufacturing.

In other Forecast findings:

  • The current operating rates are 83 percent of normal capacity in the manufacturing sector and 86.5 percent in services. Both figures are down from this time a year ago, but Nieves often says a reading above 85 percent indicates a high level of performance.
  • More than two thirds (69 percent) of manufacturing respondents and 64 percent in services report their companies are able to pass price increases to customers.
  • In a special question, 31 percent of manufacturing respondents indicated supply chain conditions have returned to pre-pandemic norms, 45 percent expect it to occur in 2024, and 24 percent indicated it might never happen. In services, those figures are 22 percent, 50 percent and 28 percent, respectively.

ISM’s Spring 2024 Semiannual Economic Forecast will be released in May.

(Photo credit: Getty Images/Juanmonino)

About the Author

Dan Zeiger

About the Author

Dan Zeiger is Senior Copy Editor/Writer for Inside Supply Management® magazine, covering topics, trends and issues relating to supply chain management.