Although a surprisingly large number of manufacturing CEOs remain cautious about the overall rate of the U.S. recovery from last year's recession, the economic fundamentals for manufacturing continue to improve. Indeed, June's quarterly measure of future business activity from the Manufacturers Alliance/MAPI was an encouraging 63%, the highest that the composite index has been since the 64% recorded in June 2000. "At 63%, the index is signaling that manufacturing output is expected to increase over the next three months," notes Donald A. Norman, the Manufacturers Alliance/MAPI economist who coordinates the survey on which the index is based. "This is further evidence of a strong rebound from last year's severely depressed levels." June's figure marks the second consecutive calendar quarter in which the index -- a weighted measure of shipments, backlogs, inventories and profit margins -- has been above its 50% growth/no-growth level. In contrast, in March 2001, the month that the National Bureau of Economic Research says the most recent U.S. recession began, the business outlook index was at a 29-year low of 34%. Delving into the details, the alliance's most recent survey of 59 senior financial executives from member companies yielded a shipments index of 68%, up from 53% in March of this year. In short, manufacturers expect to be shipping more goods in the third quarter of 2002 than they did in the third quarter of last year. "This is the second consecutive quarter that [the shipment index] has been above 50%, the dividing line between expansion and contraction," emphasizes Norman. And that's a good sign. Backlogs are another positive business sign. That index jumped to 60% in June from 34% in March, suggesting that new orders are coming in faster than shipments are going out. Meanwhile, the inventory index increased to 30% in June from 20% in March. "Because the inventory index remains below 50%, an inventory correction process that started last year continues for the manufacturing sector as a whole," states Norman. "However, the rise in the index suggests that many firms are beginning to rebuild their inventories." The alliance's profit margin index, too, is sending somewhat of a mixed message. It rose to 46% in June from 39% in March, its second consecutive quarterly rise. Nevertheless, "it is important to note that the index reflects year-to-year comparisons, and not actual profit levels," stresses Norman. "Profits in the manufacturing sector were very low last year, reflecting the depth of the decline in the manufacturing sector," he emphasizes. "Thus, although there has been definite improvement in profit margins, some respondents indicated that profit levels remain weak." Two other alliance indexes not included in the business outlook index are cautionary as well. In June, the annual orders index, which measures how orders for full-year 2002 are expected to compare to total orders in 2001, fell to 55% from the 62% it had reached in March. Still, the index remained above 50%, indicating overall expansion this year, Manufacturers Alliance/MAPI points out. The same cannot be said of the investment index, which measures capital spending plans for 2002. Although it rose to 36% in June from 32% in March, it remains below 50%, "indicating that manufacturers are not yet prepared to commit to long-term spending on new equipment and capacity," the Arlington, Va.-based business policy group states.