Manufacturing Index Sets Second Straight Record

For the second consecutive calendar quarter, the composite index of future business activity compiled by the Manufacturers Alliance/MAPI has reached a record level, rising to 78 in March from 77 in December of last year. "At 78, the index signals that overall manufacturing output will increase over the next three to six months," says Donald A. Norman, the economist who oversees the Arlington, Va.-based business and public policy research group's outlook survey and prepares the quarterly report. "The significance of [March's] composite index is that the previous record high level has been sustained. This lends confidence to our assessment that manufacturing activity will increase in 2004." The four-element composite index, which is based on a survey of senior financial executives in manufacturing companies, is a weighted sum of shipments, backlogs, inventories and profit margins. An index figure above 50 indicates the manufacturing sector of the U.S. economy generally is growing; a figure below 50 suggests that the manufacturing sector is contracting. Some 60 senior financial executives from the alliance's member companies took part in the most recent survey, which was distributed in early March, with responses due by March 29. The alliance's index complements the March monthly manufacturing index from the Institute for Supply Management, which also showed U.S. manufacturing continuing to expand. Delving into the details of the alliance's composite index, the backlogs index posted its sixth consecutive quarterly increase, rising to 85% in March from 80% last December "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," explains Norman. The inventory index also increased, rising two percentage points from 44% in December to 46% in March. "Because the inventory index has remained below the 50% level since June 2001, inventories generally are considered to be lean," says Norman. "This means that the ability of manufacturers to draw on inventories to meet rising demand for manufactured products has diminished." Among executives responding to the March survey, 25% indicated that inventories at their companies were higher than they had been a year before; 33% said inventories were lower. The profit margin index posted its second straight quarterly gain in March, rising to 73% from 66% in December. "This index has rebounded sharply from its low reached in March 2001, when it was just 19%," notes Norman. The index of prospective shipments was the only element of the alliance's composite business outlook index to move negatively in March. The movement was slight, however, with the index slipping only one percentage point to 90% from 91% in December. "Because the index is above 50%, overall manufacturing shipments in the second quarter of 2004 are expected to increase over second-quarter shipments in 2003," says Norman, who describes the 90% number as "still very high." Separately, in March the executives were asked to assess the new order outlook for full-year 2004. Some 90% foresaw orders increasing this year, only a bit below the 92% figure from last December' survey. But more important, for the second consecutive quarter, no executive expected that orders would fall in 2004.