What’s the outlook for the global manufacturing industry?

Moody’s says things are looking good. As one of the big three credit rating agencies (along with Standard & Poor’s and Fitch Group), they devote plenty of research and expertise to tools and analysis in financial markets.

According to their report, “Manufacturing — Global: Earnings growth prospects drive positive outlook,” data suggests strong earnings growth, continued global economic expansion and purchasing manager optimism.

Global Report Anticipates Manufacturing Growth

In a departure from previous regionally focused reports, this global iteration considers business conditions for manufacturers in Europe, North America and Asia-Pacific over the next 12 to 18 months.

“We expect industry EBITDA growth of 3.1 percent through 2018, on strong market demand indicators and improvements in operating efficiencies and profitability,” says David Berge, Moody’s Senior Vice President. Put in context, Moody’s considers EBITDA (earnings before interest, taxes, deductions, and amortization) growth of 1-3 percent to be average, so their current report anticipates a modest increase above average growth.

Economic Factors Contribute to Expansion

What factors do they cite as contributing to industry growth?

  • Annual GDP increase in the US is projected to be stable, but modest. Moody’s projects 2.2 percent in 2017 and 2.3 percent in 2018.
  • Overall, gains in operating efficiencies are responsible for increased profits.
  • Increased GDP among manufacturing nations: The GDP growth of G-20 nations is about 3.1 percent. (G-20 is a group of 20 economically influential nations, which account for 75 percent of global trade.) This number suggests continued levels of overall economic expansion and demand for manufactured goods.
  • High demand in aerospace and defense sectors due to increased US defense budgets. Both primary suppliers and their tier 1, 2 and 3 suppliers benefit.
  • Strong demand for electric components and semiconductor products will drive increased manufacturing in Asia-Pacific markets.
  • Robust demand for manufactured goods: A survey of purchasing managers reveals optimism about strong ordering trends. The U.S PMI (Purchasing Managers’ Index) for September was 60.8, the highest level in more than 13 years. The global PMI was 53.2 in September, a six-year high. Figures above 50 indicate growth.
  • Commodities-driven segments like mining and agriculture display cyclical economic patterns, and they’re in a bullish phase right now.
  • Tax reform could offer a short-term benefit to corporations. While government maneuvering is still in process, the administration’s goal of lower corporate tax rates and full deductibility of capital expenditures could increase earnings. However, if the population at large sees a reduction in purchasing power, consumption will take a hit.
  • Energy/chemicals, transportation and automotive are predicted to show modest growth.

Some Sectors Are Slowing

Utilities are tapped as a slowing segment, with weak demand growth predicted for manufacturers which supply utilities, as they face increased pricing pressure.