Manufacturers in Minnesota, Midwest expect 2017 to trump 2016

Factory heads in Minnesota and the rest of the Midwest are ready for 2016 to be over.

Pressure from the strong U.S. dollar coupled with soft oil, mining and agriculture sectors meant tough conditions across the board. Add in some nervousness because of a pending presidential election and optimism was tepid.

Enter 2017. U.S. manufacturers say on surveys they are upbeat and cautiously optimistic about the new year. Bad trends will reverse themselves and positive trends — such as efficiency gains, infrastructure spending and improved pricing for oil and iron ore — will gain momentum, according to national and Midwest surveys.

"Manufacturers have continued to struggle. But moving forward, manufacturing leaders are cautiously optimistic about demand and production for 2017, and we would expect that this increase in activity would lead to additional hiring" in the United States, said Chad Moutray, chief economist of the National Association of Manufacturers. "We also expect construction investment to improve as we move into 2017, especially given strengthening demand and better confidence figures."

Creighton University's nine-state Mid-America Business Conditions Index measures activity on a 50-point scale. Anything above 50 means it's growing. For confidence, the number looking ahead six months went from a frail 39.7 in October to 61.6 in November.

During interviews summarized in the Dec. 1 report, supply managers repeatedly echoed the sentiment: "So glad the election is over. Let's go to work," said Ernie Goss, economic forecasting director for Creighton.

"Looking into the crystal ball for 2017, you would have to say that the manufacturing linked to energy is looking somewhat better," he said.

That's because OPEC vowed to cut oil production by 1.2 million barrels a day — a first in eight years. With curbed output, prices will rise and revive orders for equipment and supplies, he said. That should help firms such as Donaldson Co., Ecolab, Pentair, Atek and Emerson Automation Solutions' test and monitor equipment plants in Shakopee, Chanhassen and Eden Prairie. Even firms like 3M Co., which makes safety equipment, could benefit.

Job No. 1 for manufacturers: finding qualified workers for the positions available. Although plants lost 4,000 jobs in November, for a total of 60,000 U.S. manufacturing jobs lost in 2016, companies can't find enough people to replace retiring baby boomers who are trained for the more complicated jobs in today's automated factories.

The latest Manpower survey found that 15 percent of U.S. employers, including manufacturers, hope to add workers in the first quarter. About 75 percent expected employment to remain stable.

Employment aside, manufacturers say they expect other challenges in 2017, such as sluggish crop and ag equipment spending, a strengthening dollar, rising interest rates and inflation. But economists believe they will see some relief in 2017 as global economies improve and promises from President-elect Trump's administration fall into place, industry experts say.

"We will be looking for signs of progress on the [U.S.] export front. Net exports were a bright spot in the most recent GDP data for the third quarter," Moutray said.

U.S. exports were squeezed by the high U.S. dollar and limping demand from Canada, China and Brazil. (Minnesota exports fell 2 percent or $124 million during the third quarter after plunging a respective 8 and 5 percent during the previous two quarters.) The combined woes meant manufacturing executives spent much of 2016 downshifting profit forecasts that turned out to be overly optimistic.

But now, "we are seeing increasing signs of a synchronized rebound in the global economy, particularly in developed markets, that we believe goes beyond a U.S. election relief rally or the promise of a Trump-driven fiscal stimulus package," said Scott Anderson, Bank of the West chief economist. "The promise of a significant fiscal stimulus package in the United States should help boost U.S. growth in the second half of 2017, allowing GDP growth to accelerate from an estimated 1.6 percent in 2016 to 2.2 percent in 2017."

If true, U.S. foundries, metal stampers, machine and electronics plants may enjoy a comeback from the slump in durable goods that hurt makers of appliances, machinery and transportation equipment for much of 2016.

Another boost could materialize if Trump fulfills promises for major road, bridge and rail infrastructure spending.

"It's not hard to see how modernizing our energy and transportation infrastructure will create good-paying American jobs," said National Association of Manufacturers CEO Jay Timmons.

Separately, U.S. factories will benefit if Trump follows his pledge to slash taxes on repatriated corporate earnings from overseas. If a one-time tax-cut materializes, "3M, Cargill and other companies that are important to Minnesota will certainly bring those earnings back home to the U.S.," Goss said. "Some of that will result in new corporate spending in the second and third quarter of 2017. And some of it will go into paying corporate salaries, dividends to shareholders and buying back company stock."

Donaldson CFO Scott Robinson told analysts in December that the industrial filtration giant "would be glad" to take advantage of policy changes that helped corporations bring cash back into the U.S. "It's certainly something we think about a lot."

Still, Donaldson CEO Tod Carpenter isn't moving the needle just yet on sales and profit expectations.

Donaldson "is maintaining a cautious stance," Carpenter said. "Our assessment of the overall environment remains somewhat mixed as recent signs of stability within our business are not yet translating to meaningful improvements in end-market conditions." Carpenter predicts Donaldson's sales could rise or fall 2 percent in 2017.

Other producers are also cautious. In October, Maplewood-based 3M Co. narrowed its earnings forecast for full 2016, even though officials expect to see improvements soon in select businesses.

"We do expect our industrial and our electronics and energy [group] to have improved growth rates in 2017 vs. what we have been seeing in 2016," 3M CFO Nick Gangestad recently told investment analysts during a presentation.

3M industrial business head Mike Roman said growth opportunities exist for 3M products aimed at auto, aerospace and automation customers.

"Market cycles that have been a headwind for us in 2016 start to moderate and even improve as we move into the new year," Roman said. "Our product sales into oil and gas are stabilizing. Our defense business is improving and our demand for our specialty polymers is increasing."

Dee DePass • 612-673-7725