Manufacturers Alliance/MAPI Survey Encourages Optimism

Results of the latest Business Outlook Survey from the Manufacturers Alliance/MAPI are a bit more encouraging than Federal Reserve Board Chairman Alan Greenspan has been recently. Having recovered from a record low of 34% in March 2001, the manufacturing research group's quarterly business outlook index -- a weighted sum of shipments, backlogs, inventories and profit margins -- remains at 40%, the same as in September 2001. While the just-released figure suggests North American manufacturing output will continue to decline during this first calendar quarter of 2002, there are encouraging signs that "indicate the manufacturing sector is on the road to recovery and that overall activity could increase for all of 2002," says Donald A. Norman, the economist who sampled the views of 120 senior financial officers of the Arlington, Va.-based Manufacturers Alliance/MAPI's member firms. In contrast, a rather downbeat Greenspan told a San Francisco audience on Jan. 11 that despite "a number of encouraging signs of stabilization" it's too early to conclude that a sustainable recovery from recession is under way in the U.S. economy. Manufacturers Alliance/MAPI data, which derive from a December 2001 survey that had a 47% response rate, show manufacturers' inventories continuing to decline. Some 52% of the 56 executives responding say their companies' inventories in December were below year-before levels. That pushed the alliance's lower-is-better inventory index down to 36%, fractionally under September's 37% but dramatically below March 2001's 67% and June's 45%. "Such corrections are generally thought to be prerequisite for [economic] recovery, and, hence, the continuing correction is a hopeful sign," notes Norman. At the same time, the percentage of manufacturers expecting shipments to rise is increasing and the percentage anticipating a decline is falling even faster. The alliance's shipments index is now at 42%, compared with 37% in September 2001. However, the standout statistic from the latest Manufacturers Alliance/MAPI survey is one that doesn't figure in the calculation of its business outlook index. At 57%, the forward-looking measure of new orders is up 25 percentage points from the 32% recorded in September 2001. Because the new figure is above the index's 50% crossover point between contraction and expansion, this suggests that orders for durable and nondurable goods this year will exceed last year's, Norman says. Indeed, of the 56 senior financial executives responding to the survey, some 45% believe total orders will be higher in 2002, 30% say they'll be below 2001's level, and 25% indicate they'll be about the same. In contrast, in September 2001, 62% expected manufacturers' orders would be down, only 26% figured they'd be up, and 12% said orders in 2002 would be about the same as in 2001. A couple of other measures that also don't factor into the business outlook index are encouraging as well. For example, the alliance's R&D index, which indicates the expected direction of research-and-development expenditures during the next 12 months, rebounded to 48% in December 2001 from September 2001's all-time low of 44%. And the capital-spending index rose to 38% from 29%, with a sharp decrease in the percentage of companies forecasting lower investment outlays in 2002 than in 2001. "Although [these] two indexes remain below the 50% level, the fact that they increased offers further sign of a turnaround in manufacturing in 2002," says economist Norman. The bottom line is that among economic indicators, the results of the Manufacturing Alliance/MAPI latest survey of business have more in common with the still-scattered reports of U.S. manufacturers starting to ramp up production to meet new orders than with the most recent figures for U.S. machine tool consumption, which fell 16.6% between October and November of 2001.