Future Business Activity Indicator Hits All-Time Low

The economic recession in U.S. manufacturing is deep. And it is likely to get deeper during the current calendar quarter, suggests the Arlington, Va.-based Manufacturers Alliance/MAPI. At 34%, its Business Outlook Index is sending a strong signal that manufacturing output is likely to continue to decline between now and the end of June. Significantly, the index, a highly regarded predictor of future business activity, is now at its lowest point since the manufacturing research group began compiling the measure in 1972. What's more, the decline in the index of future business activity to 34% in March 2001 from 50% in December 2000 is the largest single calendar-quarter drop since Sept. 1991, when the index was first compiled quarterly. The index's tipping point between expansion and contraction is 50%. Above the mark, manufacturing is growing; below it, the output of U.S. goods is shrinking. The index is a weighted sum of indexes for manufacturing shipments, backlogs, inventories, and profit margins, and is compiled from data provided by senior financial officers of U.S.-based manufacturers. The latest data are a product of the Manufacturers Alliance/MAPI survey of 120 of its 450 members during the first week of March; the response rate was an impressive 41%. During this year's first three months, the forward-looking Manufacturers Alliance/MAPI shipments index plunged to 36% from 58%. Its profit-margin index sank to 19% from 46%, the lowest it had been since the 18% recorded in the July-September quarter of 1982. At that time the U.S. economy was in a severe recession. The index of order backlogs fell to 47% from 54%, not a positive sign because the index is below 50%. However, the index of manufacturers' inventories remained at 67%, "suggesting that the growth in inventories may have peaked," notes Donald A. Norman, the Manufacturers Alliance/MAPI economist who compiles the data. Separately, the survey confirms that U.S.-based manufacturers have dramatically lowered their capital-spending expectations for 2001. Only 19% of the senior financial officers responding now expect their companies' capital outlays to be higher this year than last. Some 44% believe they will be lower. Three months ago, the executives were evenly divided, with 35% saying their capital investments would increase and 35% saying they'd decrease. A solid-majority 74% of the financial executives predict long-term interest rates will fall during the current calendar quarter. Only 2% expect an increase. Some 24% believe long-term rates will remain about the same. "The fact that the [U.S.] Federal Reserve Board . . . has reduced its overnight lending rate by 150 basis points since the beginning of the year probably has much to do with these expectations, even though the Fed may be following rather than leading the decline," says economist Norman.