Consistent with slower overall domestic economic growth, the manufacturing sector of the U.S. economy will likely continue to expand during the next three to six months, but at a slower rate than it did during the first six months of 2006, indicate data released July 13 by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group.
The alliance's composite business outlook index in June was at 71, three percentage points lower than the 74 reported in March. "The decline in the index points toward continued expansion, but at a slower rate than was observed during the first half of the year," states Donald A. Norman, the alliance economist who oversees the membership survey from which the composite index and several individual indexes not included in the composite index are compiled. "These indexes remain at relatively high levels and indicate that most senior financial executives who responded to [the most recent] survey expect continued growth over the next three to six months," says Norman. Sixty senior financial executives participated in the most recent survey, which was completed on June 30.
A composite index figure above 50 indicates that the manufacturing sector generally is expanding; a figure below 50 signals the sector is contracting.
The composite index is a weighted sum of manufacturers' prospective shipments, backlogs, inventories and profit margins.
The prospective shipments segment, which compares expected quarterly shipments with actual quarterly shipments a year ago, decreased to 83% in the June alliance survey, down from 90% in March. "The index remains at a relatively high level, and shipments, in most industries, are expected to increase on a year-over-year basis," adds Norman. Indeed, although somewhat fewer than in March, 73% of the executives in the June survey still expected shipments to increase; only 7% expected them to decrease.
The backlogs index, which compares new orders with shipments, fell two percentage points between March and June, slipping to 75% from 77%. But as a business marker, it "remains at a high level," stresses Norman. The alliance economist notes that the index has exceeded 70% for every calendar quarter since December 2003.
Although manufacturers' inventories are higher now than a year ago, companies appear increasingly to be disciplining their stock. The alliance's inventories index fell to 62% in June from 67% in March, the first quarterly decline in since June 2005.
Finally, the profit margin index, the fourth component of the composite business activity index, fell to 74% in the June survey from a record high of 82% in March. "Although the index fell, the profit margins for most companies are higher on a year-over-year basis," judges Norman.