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Transport, warehouse executives to floor CapEx pedal in 2019, ISM outlook finds

Blue skies for 2019 CapEx (Photo: Shutterstock)

Supply and purchasing managers in the transportation and warehousing arenas will significantly ramp up their capital expenditures in 2019 as part of what is overall a reasonably optimistic outlook for the U.S. economy, the Institute of Supply Management (ISM) said today in releasing its forecast for next year.

According to a survey of executives in the service sector, which includes transport and warehousing, 2019 CapEx will rise by 3.4 percent. However, the 43 percent of service sector respondents who expect to boost their CapEx will do so, on average, by 13.8 percent, according to the survey. Transportation and warehousing will lead the pack in terms of percentage increases, ISM said, without disclosing specifics. Manufacturers will boost CapEx, on average, by 6 percent next year, according to the report.

Transport and warehousing also reported the highest year-on-year CapEx gains in 2018 as a stronger economy and secular growth in e-commerce boosted investments in transport equipment and big warehouses.

The main reason for CapEx increases will be the general business outlook and not any residual impact from the tax bill signed into law at the end of 2017, according to the report. Many economists think the favorable provisions included in the law were felt in the first half of 2018 and have largely faded

U.S. economic growth will continue in 2019, though at a more moderate pace than in 2018, according to the surveys, which polled more than 800 executives in the manufacturing and service sectors. The respondents are the same executives who are part of the two monthly surveys that constitute ISM’s “Report on Business.” Both surveys are considered influential in tracking near real-time economic activity at the ground level.

Revenues are expected to increase in 17 of the 18 manufacturing and service industries that ISM surveys each month. Only coal and petroleum products in the manufacturing sector, and public administration in the service sector, did not expect increases.

On average, manufacturing executives expect a 5.7 percent “net” increase in 2019 revenues, up from a 5.1 percent increase predicted in 2018 over 2017 levels, ISM said. Executives in the service sector forecast a 3.7 percent net revenue gain, down from the 4.5 percent increase in 2018 over 2017 levels. The report arrives at the “net” totals by averaging the positive and negative changes to revenue reported. 

Not surprisingly, the potential fly in the ointment is global trade, where escalating tensions between the U.S. and China have caused executives to rein in their optimism. Indexes measuring outlooks for U.S. exports and imports showed significant declines over December 2017 levels, ISM said. Still, manufacturing respondents said they expect trade activity to increase next year, according to the two surveys.

The 2019 projections “indicate a much more isolationist outlook and a retreat from the U.S. being a global trader,” said Timothy R. Fiore, who chairs the Report on Business’ manufacturing committee and who co-authored the report released today.

Anthony S. Nieves, who chairs the service sector’s monthly survey and served as the annual report’s other author, added that the geopolitical uncertainty has led respondents to either put on hold our suspend “capital reinvestment and other expenses” in favor of a `wait and see’ approach.”

Another challenge will be the continued pressure on raw materials prices. Manufacturing executives predicted a 3.3 percent increase next year, compared with a 5.1 percent rise in 2018. Service sector executives forecast a 3.6 percent increase, up from 2 percent from 2017 to 2018.

About 35 percent of manufacturing executives and 32 percent in the service sector expect profits to be higher between now and May, the next time respondents can update their 2019 forecasts. The largest percentage for each group said they expect no change in profit margins over the next 6 months, according to the survey.

As might be expected, executives are having trouble finding qualified workers. More than 78 percent of manufacturing executives and 72 percent of service executives report difficulties in hiring workers. Both levels were significantly higher than the December 2017 responses.

About 51 percent of manufacturing executives said tariffs would lead to higher prices, significantly below the 73 percent reading in May. About 65 percent of manufacturing respondents said their companies were evaluating new supply sources and manufacturing locations as a result of U.S. tariffs. By contrast, only 36.4 percent of service sector respondents said they were looking to make changes. This is likely a reflection of the service sector’s strong domestic orientation.

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Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.