A sharp, precipitous slide has gripped the manufacturing sector and will pose consistent challenges in the next three to six months, according to the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook -- December 2008. At this level, the index indicates that overall manufacturing activity is expected to contract over the next three to six months.

The index is at its lowest level since the survey originated in March 1972.

"It seems as though manufacturing activity in most industries hit a wall following the credit crunch that erupted in mid-September," said Donald A. Norman, Ph.D., MAPI Economist."A second factor, and related to the credit crisis, is the rapid slowing of economic activity in countries that are major trading partners of the United States."

The export orders index, which measures how fourth quarter 2008 exports compare with those of fourth quarter 2007, declined to 25% in December from a strong 76% in the September survey. The non-U.S. prospective shipments index, which measures expectations for anticipated shipments by foreign affiliates of U.S. firms outside the United States in the first quarter of 2009 compared to the same quarter of 2008, fell to 27% from 73%.

The annual orders index tumbled to 16% in December compared with 58% in the September survey.

The backlogs index, which compared the fourth quarter 2008 backlog of orders with the backlog of orders one year earlier, fell to an all-time low of 21% from 49% in the September survey. An accumulation of backlogs usually occurs when new orders exceed shipments.

The U.S. investment index, which queried executives on their expectations regarding capital investment in 2009 compared to 2008, decreased to 30% in December 2008 from 56% in the prior survey. The non-U.S. investment index provides insight into expectations regarding capital expenditures abroad in 2009 compared to 2008 was at 40%, well below the 64% in the September survey and indicates that investment outside the United States is expected to fall this year.

The research and development (R&D) fell to 50% in December as compared to 71%.

The capacity utilization index, based on the percentage of firms operating above 85% of capacity, fell to 26.7% in the current survey from 36.7% three months ago.

The profit margin index fell to 43% in December compared to 53% in the September report, the fifth straight quarter of decline.

The inventory index dropped to 50% in December from 58% in September. The fall in this index may indicate some success on the part of manufacturers in paring excess inventories, says MAPI.

In reply to a related question on credit market conditions and their impact on manufacturers, 66.7% of respondents expect that the covenants on the next revolver with their banks will be more stringent, and 91.7% anticipate the cost of obtaining a revolver will increase. Forty-one percent indicated that credit market conditions have not impacted the investments or acquisitions of their companies while 37.7% characterized the impact as "moderate to significant."