Manufacturing Business Index Reaches Record High

The composite index of future business activity calculated by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group, reached 77 last month, up nine points from September 2003's 68 and the highest level reached in the index's 31-year history. The index indicates that U.S. manufacturing output should increase during the next three to six months. The previous index high was 76 in March 1973, when the business outlook index was compiled semiannually; the index has been compiled quarterly since 1991. "The expected expansion in manufacturing activity is consistent with current economic forecasts showing gross domestic product . . . increasing by about 4% in 2004," states Donald A. Norman, the Manufacturers Alliance/MAPI economist who oversees the group's business outlook survey and prepares the quarterly report. "This quarter's survey indicates that the manufacturing sector will be a participant in -- and contributor to --overall economic growth." The composite index, based on a survey of senior financial officers in manufacturing companies, is a weighted sum of shipments, backlogs, inventories and profit margins. An index figure above 50 suggests the manufacturing sector of the U.S. economy generally is growing; a figure below 50 indicates that manufacturing is expected to contract during the next calendar quarter. Some 52 executives of Manufacturers Alliance/MAPI member companies participated in the most recent survey, which was distributed in early December 2003 with responses due by Jan. 5, 2004. Looking at the details of the composite index, the index of prospective shipments -- how the executives expect shipments for the first quarter of 2004 to compare with those for the first quarter of 2003 -- rose to 91% in December. In September, the comparable year-to-year figure was 80%. "The percentage of respondents expecting shipments to rise increased from 67% in September to 85% in December, while just 4% expect shipments to be lower," Norman reports. The remaining 11% judged shipments would be about the same. The quarterly backlogs index also increased, rising to 80% in December from 69% in September, indicating that overall backlogs are higher now than they were a year ago. "An accumulation of backlogs -- and a rising backlogs index -- usually occurs when new orders exceed shipments. Thus, the rising backlogs index is a positive sign," Norman explains. The overall inventory index rose to 44% in December from 33% in September, suggesting that stocks are less lean. However, "although the index rose, the fact that the index remains below the 50% level indicates that inventories are lower than one year ago," stresses Norman. Indeed, he relates that just 20% of the executives reported higher inventories, while 33% said their inventories were lower. Forty-seven percent reported them about the same as a year ago. The profit margin index surged between September and December, rising from 45% to 66%. "At 66%, the index indicates that profit margins currently are above their level in December 2002, when profit margins were depressed," states Norman. Three measures of manufacturing activity not included in the composite index also are worth attention. First, the annual orders index, which compares 2003 orders with expected orders in 2004, rose to 96% in December from 88% in September, a clear indication that most manufacturers expect orders to rise this year. Second, the percentage of companies operating at less than 75% of capacity decreased to 21.6% in December from 36.5% in September, "suggesting increased activity by firms that were particularly impacted by the recession in the manufacturing sector," says Norman. (It's also the second consecutive quarter that capacity utilization among the surveyed manufacturing firms has improved.) Third, the investment index, which compares year-to-year capital spending, rose to 81% in December from 64% in September. "This is the highest level reached by this index in the past 30 years, and its level indicates that capital spending should rise in 2004, thereby contributing to the [U.S.] economy's recovery," says Norman.