Manufacturers Alliance Index Eases Off Record Pace

But data suggest broad-based expansion is likely to continue.

U.S. manufacturing's recovery from the 2001 recession is likely to continue during the next three to six months but at a somewhat slower pace than has recently occurred, indicates the latest quarterly business outlook from the Manufacturers Alliance/MAPI. The Arlington, Va.-based business and public policy research group's September composite index of future business activity stands at 75, down from an all-time high of 80 in June of this year. Other economic indicators, including U.S. factory orders in August and the Institute for Supply Management's manufacturing index for September, have signaled some slowing of growth, and the decline in the alliance's index is consistent with them. None, however, suggests a manufacturing contraction is in the works. Indeed, the alliance stresses that its index remains high relative to the trend of the past 13 years. "While the pace of growth may have slowed in the third quarter, the survey [on which the outlook index is based] shows that the manufacturing expansion is broadly based, with most industries growing, and has a solid foundation of rising domestic and foreign demand," stresses Daniel J. Meckstroth, chief economist for the alliance. The composite index of future business activity, based on a survey of senior financial executives among the alliance's member companies, is a weighted sum of prospective shipments, backlogs, inventories and profit margins. An index figure above 50 indicates that manufacturing activity generally is expected to increase during the next calendar quarter; a figure below 50 suggests manufacturing will be contracting. The alliance emphasizes that the index measures the direction of change in manufacturing activity, not its absolute strength. Some 62 executives participated in the most recent survey, which was sent out at the beginning of September with responses due by Sept. 24. The index of prospective shipments was a "solid" 93% in September, unchanged from June, notes Donald A. Norman, the economist who oversees the alliance's outlook survey and prepares the quarterly report. "Because the index is above 50%, overall manufacturing shipments in the fourth quarter of 2004 are expected to increase over fourth-quarter shipments in 2003," he explains. "The expected year-over-year growth is significant because shipments in the fourth quarter of 2003 were on the rise, making the continued strength of this index all the more impressive." The backlogs index slipped to 86% in September from 93% in June, indicating that new orders are still exceeding shipments but not by quite as much. The inventory index rose to 69% in September from 61% in June, the second consecutive quarter that the index has been above 50%. "The fact that inventories are increasing likely reflects rising demand for manufactured goods over the past year as well as expectations that demand will continue to grow throughout the remainder of [this] year," says Norman. "However, the rise also may be a result of a slowdown in the current pace of activity." Finally, the profit margin index declined to 73% in September from 79% in June. "Although the index slipped, it remains well above the 50% level indicating that, for most firms, profit margins are higher than a year ago," Norman states.

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