At UBS Investment Research, economists are betting that rising final demand and inventory building will revive U.S. factory production during this calendar quarter. They might want to hedge their bets just a bit. The quarterly composite index of future business activity compiled by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy group, fell to 60% last month, down from 63% in March of this year and below the five-year high of 67% recorded in December 2002. However, because the June figure was above the 50% mark that separates manufacturing expansion generally from contraction, U.S. manufacturing output is expected to increase during the next three to six months. A manufacturing recovery is still possible, although it could be slower than normal for this stage of U.S. recovery from an economic recession. Indeed, uncertainty about how much American consumers will be spending coupled with sluggish economic growth among major U.S. trading partners, questions about business and consumer confidence, relatively high U.S. natural gas prices, and the continuing possibility of deflation in the U.S. "make predictions about economic growth difficult," states Donald A. Norman, an economist at Manufacturers Alliance/MAPI. The Manufacturers Alliance/MAPI index of future business activity is a weighted sum of four component indexes: prospective shipments, backlogs, inventories and profit margins. And the latest data are consistent with a somewhat mixed manufacturing picture. The prospective shipments index, which compares next-quarter expectations to year-before actual data, rose slightly to 70% in June from 69% in March. The backlogs index also increased slightly, rising to 56% in June from 54% in March. The inventory index rose to 42% in June from 36% in March. "Although inventories are lower than one year earlier, the rise in the index indicates that some manufacturing sectors are starting to rebuild inventories," notes Norman. "If this continues, it will contribute to an expansion of activity later this year." Finally, the profit-margins index fell from 59% in March to 47% in June, its second consecutive quarterly decline. "The decline in this index reflects a weakness in the manufacturing sector and is consistent with the price trends of many durable manufactured products," says Norman. New orders are not an element of the Manufacturers Alliance/MAPI index of future business activity. But questions about new orders are included in Manufacturers Alliance/MAPI's quarterly business survey and a separate index is calculated. The new orders index fell to 53% in June from 67% in March. "Some of the decline may be due to the impact of the war in Iraq, which ended in May," says Norman. "The fact that the index was above the 50% level indicates that the volume of new orders in the second quarter was greater than one year ago, but just slightly." The latest quarterly survey from which all the numbers are drawn was conducted during June and reflects the views of 53 senior financial executives in Manufacturers Alliance/MAPI member companies.