At Optimation we support the manufacturing industries with engineering, design, and skilled trades’ services. In part, our success is based on the strength and growth of the US manufacturing sector. 2015 was not one of our best years and we heard similar reports from many others providing industrial services. 2015 is a year when manufacturing in the US has been challenged. The Institute for Supply Management said that its manufacturing index dropped to 48.6 last month. This is the lowest their manufacturing index has been since June 2009. We all remember 2009. No one believes that 2015 has been as bad as it was in 2009, and it isn’t for the economy as a whole. In fact, the economy has recovered to a point where the Federal Reserve may raise interest rates for the first time since 2008.
If the economy overall is improving why is US manufacturing declining? Employment is increasing. Higher employment, more spending power and higher consumer confidence drive demand for manufactured products. It would seem like the demand for manufactured goods and manufacturing itself should be increasing. If these were the only factors we would expect manufacturing to be increasing. But there are other factors as well. Three of the major factors causing the 2015 manufacturing decline were the strong dollar, China's economic restructuring, and lower oil prices.
While low gas prices at the pump provided more spending power for the average citizen and can improve the economy, low oil prices negatively impact manufacturing. Oil exploration, drilling and refining consumed a large portion of the economy and this demand was slowed dramatically. Energy firms reduced orders for manufactured equipment and this in turn reduced the demand for steel and other commodities required to make them. So there was a compound impact. In addition to the jobs lost directly in oil and gas companies, many plants in their supply chain also reduced spending. The impact of these collectively drove the manufacturing sector down.
After the declines in 2015, what is the outlook for US manufacturing in 2016 and will we rebound from the challenges of 2015: slow worldwide growth, low oil prices, and the high value of the US dollar?
The Manufacturers Alliance for Productivity and Innovation (MAPI) in their November five-year forecast state that they believe the decline in manufacturing has bottomed out. The impact of the strong dollar and lower oil prices will have a reduced impact going forward. Consumer demand in the US, driven by US job growth, should finally reduce the inventory surpluses and there should be modest acceleration in manufacturing for the next two years. Their prediction is that manufacturing should grow 2.6 percent in 2016 and 3 percent in 2017
This is good news for manufacturing firms and for us at Optimation Technology, Inc. as well. We provide engineering, fabrication and installation services to the manufacturing sector. Manufacturers rely on us to design, fabricate and install new manufacturing equipment and automation systems for them. We look forward to 2016, increases in oil prices, declines in the dollar and the resulting slow but steady growth in manufacturing that MAPI is forecasting.
Image source: National Association of Manufacturers