Manufacturing Sector Continues To Show Weakness

The Alliance/MAPI Business Outlook Index declines to 57 from 64.

Manufacturing, as many expected during the current economic slowdown, is showing signs of strain according to the Manufacturers Alliance/MAPI Survey on the Business Outlook. The March 2008 composite index registered a fall to 57 from 64, reported in the December 2007 survey, and is the lowest since the 54 recorded in the December 2006 survey.

A business index above 50 indicates that overall manufacturing activity is expected to increase over the next three to six months.

"Despite the fact that all the indexes remain above the 50% threshold separating growth from contraction, the fact that they all fell indicates that the growth of U.S. manufacturing activity is slowing," said Donald A. Norman, Ph.D., Manufacturers Alliance/MAPI Economist and survey coordinator. "At the same time, most of the companies represented in the survey are global, and the outlook for business abroad is somewhat rosier. Global growth will help offset any slowing of activity in the United States."

MAPI has initiated two additional indexes that will help capture the global activity of respondent companies, most of which are multinational enterprises. The prospective non-U.S. shipments index measures expectations for anticipated shipments outside the U.S., in this case for the second quarter of 2008 compared to the same quarter of 2007. The inaugural index of 80% is considerably greater than the U.S. prospective shipments of 62%. Sixty-eight percent of respondents expect foreign shipments to increase over the same quarter in 2007.

The non-U.S. investment index provides insight into expectations regarding non-U.S. capital expenditures, comparing a firm's outlook for 2008 with 2007. Again, the index of 75% in the March survey is stronger than the 62% of its U.S. counterpart. Fifty-eight percent of the respondents indicated non-U.S. investment will rise in 2008 compared to 2007.

Also in the report, senior financial executives reported on the extent of their global operations. On average, 38.1% of revenues were derived from sales outside the U.S. in the most recent fiscal year, a clear increase from 31.1% of non-U.S. sales three years ago. The rising importance of global operations raises questions about the future of U.S.-based production capacity. A slight majority, 51.5%, forecasts U.S. production capacity to grow over the next five years compared to 27.3% who said it would decline. In terms of exports, 80%of respondent firms expect exports to increase in 2008.

"Companies with global operations should be in a better position to withstand a U.S. slowdown because their businesses are, in effect, well diversified geographically," Norman concluded.

Looking at the specific indexes, the U.S. investment index, which queried executives on their expectations regarding capital investment in 2008 compared to 2007, fell to 62% in the March 2008 report from 74% in December 2007. The backlogs index of 55% represents retrenchment from 67% in the December 2007 survey and the prospective U.S. shipments index declined to 62% from 74 percent.

Additionally, significant declines were found in two other indexes. The quarterly orders index, which compared new orders for the first quarter of 2008 with the same quarter one year ago, fell to 58% from 69%, while the inventory index, based on a comparison of inventory levels in the first quarter with those of one year ago, fell to 54% in March from 64% in December. This index is at its lowest level since March 2004, suggesting that manufacturers are reining in inventory growth, says the report.

The capacity utilization index, based on the percentage of firms operating above 85% of capacity, dropped to 38.3% in March 2008 from 46.5% in December 2007, although remaining above its long-term average of 33%.

The exports orders index fell to 72% from an all-time high of 80% in the previous survey. Meanwhile, the profit margin index also gave back eight points, falling to 60% in March in relation to 68% in the December report.

The R&D index dropped to 72% in March from 77% in the December survey.

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