Manufacturing Measure Rebounds Sharply

It's not yet time to break out the bubbly and toast the end of a nearly three-year U.S. manufacturing recession. But executives eyeing the results of the latest quarterly composite index of future business activity compiled by Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group, can be excused for being in a celebratory mood. The index rebounded sharply in September, rising to 68% last month from 60% in June and indicating that U.S. manufacturing output should increase during the next three to six months. Indeed, September's composite index along with other survey measures constitute the most optimistic outlook in three years, the manufacturers group states. The composite index, based on a survey of senior financial officers in manufacturing companies, is a weighted sum of prospective shipments, backlogs, inventories and profit margins. An index figure above 50% suggests that the manufacturing sector of the U.S. economy is growing; a number below 50% signals contraction. Some 54 senior financial executives participated in the most recent survey, which was conducted during September. Delving into the composite index's details, the prospective shipments index advanced to 80% in September from 70% in June. "The percentage of respondents expecting shipments to rise increased from 57% in June to 67% in September, while just 7% expect shipments to be lower," relates Donald A. Norman, the Manufacturers Alliance/MAPI economist who oversees the group's business outlook survey and prepares a quarterly report. The backlogs index also posted a significant advance, rising to 69% in September from 56% in June. Generally when new orders exceed shipments backlogs build up and, therefore, a rising backlogs index is a positive sign, notes Norman. The overall inventory index fell to 33% in September from 42% in June, and in this instance a decline is positive. "The decline in the inventory index indicates that inventories remain lean," says economist Norman. "This should contribute to expanded production later this year and into next year to meet any increase in the final demand for manufactured products in order to maintain-and even rebuild-inventories." The profit margins index was the one element of the composite index that did not improve between June and September. It slipped to 45% in September from 47% in June, its third consecutive quarterly decline. "The decrease in this index reflects continuing competitive pressures faced by manufacturers, and it is consistent with the price trends of many durable manufactured products," says Norman. September's Manufacturers Alliance/MAPI composite index of future business activity is consistent with economic forecasts for rising growth of GDP during the second half of 2003, says Norman. But he cautions that some of the individual indexes in the latest survey compare current levels with levels a year ago, a time when manufacturing was declining. And he reminds executives that any recovery could be thwarted by such things as a slowdown in consumer spending or a jump in energy prices.