Surprise: Manufacturing Business Outlook Index Shows Expansion In March

But quarterly measure by Manufacturers Alliance/MAPI dips below December's five-year high.

The quarterly composite index of future business activity compiled by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business policy group, fell to 63% in March, down from a five-year high of 67% in December. However, the index continues to signal that manufacturing output in the U.S. will increase during the next three months, something that's in sharp contrast to the most recent Institute for Supply Management manufacturing index, which showed the U.S. factory sector contracting in March. The Manufacturers Alliance/MAPI business outlook index is a weighted sum of shipments, backlogs, inventories and profit margins. An index figure above 50% indicates the manufacturing sector is expected to expand during the next three months; a figure below 50% suggests contraction is in the works. "The continued relative strength of the composite business outlook index in March is attributable to the rise in the backlogs and inventory indexes," notes Donald A. Norman, an economist at Manufactures Alliance/MAPI and director of its financial councils. "If these two indexes continue to hold up, a measurable increase in manufacturing activity appears achievable in 2003." The backlogs index in March was at 54%, up two percentage points from the 52% posted last December, suggesting new orders were exceeding manufacturers' shipments. Some 40% of the executives responding to the latest survey said backlogs at their companies were up compared with a year ago; 32% said they were down; and 28% said they were about the same. The inventory index in March was 36% compared with 22% in December 2002. "The percentage of respondents reporting higher inventories jumped from just 9% in December to 26% in March, while the percentage of respondents reporting that inventories were lower fell from 65% in December to 55%" in March, relates Norman. Although the inventory index added 14 percentage points between December of last year and last month, the survey data show manufacturing inventories in March were lower than a year before and well below the 67% of March 2001, the month when the most recent U.S. recession was becoming widespread. The survey did turn up some signs of a slowdown during the first calendar quarter of this year. The profit margin index, one of the four components of the overall business outlook index, fell slightly to 59% in March from 63% in December. And both the shipments and export orders indexes, which do not figure into the composite index, declined between December and March. While the data from the latest Manufacturers Alliance/MAPI are a basis for guarded economic optimism, a substantial manufacturing recovery from the most recent recession is still far from a sure thing. "The strength of the recovery is dependent on the outcome of the war in Iraq, consumer spending, energy prices and housing market conditions," cautions Norman. Some 58 senior financial executives whose companies represent a broad range of U.S. manufacturers responded to the survey on which the latest index figures are based. The survey was conducted during March, with just slightly more than half of the responses arriving after March 19, the beginning of the war in Iraq.

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