U.S. Manufacturers More Cautious About Future Growth

Manufacturing Alliance's index posts second slight decrease.

The manufacturing sector of the U.S. economy likely will continue to expand during the next three to six months. But the pace of growth, as manufacturing executives become more cautious in the face of rising energy prices, is likely to be slower than it has been in recent months, indicates the latest quarterly composite index of future business activity compiled by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group. Although still high by historical standards, the index slipped to 66 in September from 68 in June, with all four of its component indexes declining. At 60, the index is at its lowest since June 2003. The index's all-time high of 80 occurred in June 2004.

"Despite the decline, the index remains at a relatively high level and points to a continued expansion of manufacturing output over the next three to six months," stresses Donald A. Norman, the alliance economist who overseas a periodic survey of senior financial executives from which the index is calculated. An index figure above 50 suggests that the overall manufacturing sector is expected to expand during the next three months; a figure below 50 signals the sector is contracting.

"Although the composite business outlook index points to growth in manufacturing throughout the remainder of 2005 and into 2006, it does not forecast what the rate of growth will be," emphasizes Norman. The alliance's most recent quarterly economic forecast projects that U.S. manufacturing production will growth by 3.4% this year and by 2.8% in 2006.

Sixty-three senior financial executives among the alliance's 450 member companies participated in its most recent survey of current and prospective business conditions. Since questionnaires were sent to them at the end of August, with replies due by September 30, the data from the survey do reflect the business impact of Hurricane Katrina.

The alliance's composite index of future business activity is a weighted sum of prospective shipments, backlogs, inventories and profit margins.

The prospective shipments index, which compares expected quarterly shipments with those the year before, fell to 79% in September from 85% in June. "Nonetheless, this index remains well above the 50% level, indicating that overall manufacturing shipments in the fourth quarter of 2005 are expected to increase over fourth-quarter shipments in 2004," states economist Norman. "The expected year-over-year growth is particularly significant because shipments in the fourth quarter of 2004 were growing strongly," he adds.

The backlogs index, which measures the extent to which new orders exceed shipments, slipped only slightly to 76% in September from 78% in June. "The backlogs index thus remains strong, indicating that backlogs continue to expand on a year-to-year basis," says Norman.

There was a rather dramatic drop in the inventory index, however. In its second consecutive quarterly decline, the index fell to 63% in September from 71% in June.

The composite index's fourth component, the profit margin index, fell one percentage point to 60% in September from 61% in June. "The profit margin index remains well above the 50% level, indicating that, for most firms, profit margins are higher than one year ago, when margins were showing improvement from their depressed levels through 2001-2002," Norman observes. However, the profit margin index was a robust 73% a year ago and September's decrease was the fourth consecutive decline.

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