ISM® Supply Chain Planning Forecast Is Another Sign of the Economy’s Resilience

Despite headwinds from inflation and geopolitics and trade policy shocks, the U.S. economy has stayed resilient, which was affirmed by the ISM^® Supply Chain Planning Forecast released this week.

Echoing recent editions of the ISM^® PMI^® Reports, many companies are more confident in their ability to navigate challenges, as survey respondents in manufacturing and services expect increased revenues, production and capital investment in their sectors. Prices are projected to increase at a faster rate, and employment growth should be modest at best.

However, an economy that has withstood shocks might dodge another bullet if the truce between the U.S and Iran holds. Forecast responses were collected before hostilities were presumed to end, a potential development that should spur growth, said Susan Spence, MBA, Chair of the Institute for Supply Management^® Manufacturing Business Survey Committee.

“If this conflict ends, we should see things really take off and sustain (in the manufacturing sector), and it’s going to be happier reporting every month,” Spence said earlier this month. As tariff anxiety wanes and if traffic through the Strait of Hormuz resumes, supply managers “hopefully won’t have to be on the edge of our seats, waiting for the next thing to happen,” she said.

The Forecast is based on responses from the ISM Manufacturing and Services Business Survey panelists that help compile the monthly ISM^® PMI^® Reports. It tracks recent sector performance, as well as expectations for the rest of the year, from the purchasing and supply executives on the front lines of the economy.

The results are not out of line with recent editions of the Manufacturing PMI^® (in expansion territory for five consecutive months) and Services PMI^® (which has grown for 23 months in a row). “It seems like confidence is that we’ll have sustained demand from a new orders and business activity standpoint,” Steve Miller, CPSM, CSCP, Chair of the ISM Services Business Survey Committee, said after the May PMI^® release.

Panelists project revenues to increase 8.4 percent in manufacturing and 8.6 percent in services. One of the biggest barometers of confidence is capital expenditures (CapEx), and companies appear more eager to invest than they were before the year: Manufacturing projects a 4.9-percent increase, up from 3 percent in December; enthusiasm is even greater in services, with an expected gain of 6.4 percent, compared to 2.5 percent in December.

The operating rate — the share of a sector’s production or provision capacity that is being used — is 86.9 percent in manufacturing, up from 82.4 percent in December. In services, those numbers (current figures, not projections) are 91.3 percent and 90.2 percent, respectively. And production capacity expectations for the rest of the year are an increase of 9.7 percent in manufacturing and 7.1 percent in services.

Those are signs of sectors that are humming, but there are concerns. Prices growth shows no signs of abating, with an increase of 11.9 percent in manufacturing through June and a projected hike of 14.1 percent for the entire year. In services, those figures are 7.7 percent and 8.9 percent, respectively.

Consumer sentiment remains at historic lows, but Spence said after the May PMI^® release: “I've concluded there is pent-up demand. Customers, whether industrial or consumers, they want the goods, and if they’ve been afraid to buy it because (of tariffs), that’s not gone away, but it’s died down.”

Tariffs comments have decreased significantly among Business Survey panelists in recent months. Miller noted that companies have developed and executed plans, even as a suite of duties are added and the Trump administration likely moves to replace the Section 122 tariffs slated to expire in July.

Labor has been a stubborn dynamic, as the Manufacturing and Services Employment indexed remain in contraction, having yet to follow the demand indicators into expansion. The Forecast provided little reassurance, with growth projections of just 1.4 percent in manufacturing and 0.9 percent in services.

An emerging question after the May PMI^® data releases: Are companies using AI to raise production without hiring workers?

In a special Forecast question, 18 percent of panelists in both sectors indicated their companies have had layoffs or are not hiring due to AI. The technology has had no effect on staffing levels for 76 percent of manufacturing companies and 73 percent in services.

“That’s something to be looking out for … understanding what type of benefits are flowing through from the use of AI,” Miller said earlier this month. “There is certainly a cost, and use cases are seeming to start to bubble up (regarding)  savings in terms of time of getting work done and on employment levels.”

In both sectors, a majority of companies — 51 percent in manufacturing and 54 percent in services — reported use of generative AI chatbots, and 45 percent and 50 percent, respectively, employ AI agents. Those findings could suggest that organizations remain in the early stages of translating technology investments into workforce changes.

Miller concluded, “I’m looking to see that in the commentary, to understand if that might be part of the reason for any reluctance to hire.”

Among other Forecast findings:

• Only 10 percent of services companies and 32 percent in manufacturing are increasing inventory levels in response to trade-policy or geopolitical uncertainties. These figures appear to confirm that recent increases in the Inventories indexes — especially in Services, which tied an all-time high (62.5 percent) in May — have been driven by companies’ demand confidence rather than panic buying.
• More than three quarters (77 percent) of manufacturing panelists indicate their companies plan to pass along at least some tariffs costs to customers; that figure is 59 percent in services.
• In a special question, 75 percent of manufacturing respondents and 80 percent of those in services reported that rising oil prices would have either a small or large negative effect on their businesses. Many companies indicated they expect to respond by raising prices, absorbing margin reductions or a combination of both.

(Photo credit: Getty Images/Kosamtu)