Manufacturers' optimism rises in the first quarter

Manufacturers argue that the economy is a complicated combination of progress and persistent headwinds that continue to hold back hiring and, in turn, hold down growth. 

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But there are signs of increased activity for manufacturers early in 2013, including evidence in the Institute for Supply Management's (ISM) most recent gauge of activity, which has reflected positive returns for three straight months after a contraction. 

While political frustrations remain a major concern, especially with across-the-board federal spending cuts that went into effect on March 1, other noted challenges include the tax and regulatory climate (67.7 percent), weaknesses in the domestic economy and sales (49.9 percent) and attracting and retaining a quality workforce (41.1 percent). 

In addition, many of the nation's largest trading partners — with the exception of those in Europe — have made some progress in the past few months, which should boost exports moving forward. 

Looking ahead, almost 45 percent of respondents view increasing international sales as a primary driver of future growth, with many ramping up their efforts. 

More than 84 percent of manufacturers planning for increased exports have a positive outlook, compared with just 63.3 percent for those who did not, the survey showed.

However, many of the problems in the last survey continue to persist. 

Manufacturing production declined 0.4 percent in January, and many of the regional Federal Reserve Bank sentiment surveys report ongoing weaknesses with new orders, shipments and especially hiring growth, the survey said. 

The percentage of respondents reporting a somewhat negative outlook nearly tripled in the second half of the year, increasing from 15.8 percent in the second quarter to 38.9 percent in the fourth quarter. 

Also consistent with past surveys, results varied by firm size. 

In this survey, larger manufacturers — those with 500 or more employees — were more positive than their smaller counterparts. 

Three-quarters of large businesses were positive in their outlook, versus 70 percent for medium-sized and 65.6 percent for smaller manufacturers.

The largest factor explaining this difference was sales, with large manufacturers forecasting sales growth of 3.5 percent on average over the next year. That drops to 2.3 percent for medium-sized and 1.2 percent for small manufacturers. 

These findings reflect the projected 1.5 percent increase in manufacturing production over the next six month and average sales growth of 2.3 percent this year.

Meanwhile, for this year, capital spending and employment growth rates are expected to be 0.9 percent and 0.7 percent. 

While the figures do not suggest rapid growth, they track at a slightly faster pace than predicted in the fourth quarter of 2012, the survey found.

This story was updated at 9:55 a.m. 

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