U.S. Manufacturing To Grow Slower

Slight fall in Manufacturing Alliance index follows slight increase.

The manufacturing sector of the U.S. economy will likely continue to expand, but, indicates a report released July 14, the pace of growth during the next three to six months may be a bit slower than some other recent economic reports have suggested.

Following a one-point increase to 71 in March, the quarterly composite index of future business activity among U.S. manufacturers compiled by the Manufacturers Alliance/MAPI fell three points to 68 in June. All four elements of the index posted declines from March to June, yet the June figure remains high by historical standards, the alliance stresses.

The latest data "point toward continued expansion in manufacturing activity, albeit at a slower pace than last year when the manufacturing sector was rebounding from a prolonged downturn that began in the middle of 2000," says Donald A. Norman, the alliance economist who overseas the periodic survey of senior executives from which the index is calculated. "It is important to recognize [the] indexes recently were at or near record highs and that some slippage was to be expected," he adds.

The Arlington, Va.-based business and public policy research group's composite index of future business activity is a weighted sum of prospective shipments, backlogs, inventories and profit margins. An index figure above 50 indicates the manufacturing sector of the economy is generally growing; a figure below 50 suggests manufacturing will be declining in the coming calendar quarter.

Some 60 senior financial executives among the alliance's 450 member companies participated in the most recent survey of current and expected business conditions. Questionnaires were sent to them at the beginning of June, with responses due by month's end.

Among the four elements of the manufacturing outlook index, the data show the prospective shipments index slipping to 85% in June from 91% in March. "Nonetheless, this index remains will above the 50% level, indicating that overall manufacturing shipments in the third quarter of 2005 are expected to increase over third-quarter shipments in 2004," says Norman. The backlogs index, a measure of how much new orders exceed shipments, slipped to 78% in June from 81% in March. Inventories were growing less rapidly in June than in March, with their index falling to 71% from 74%. And the profit margin index decreased to 61% in June from 66% in March, as companies reporting higher margins fell to 50% from 55% and those reporting lower margins increased to 28% in June from 23% in March.

Although manufacturing investment and capacity utilization are not factored into the business outlook index, the alliance's survey does ask about them. And Norman is particularly encouraged by March-to-June increases. The investment index advanced to 78% in June from 69% in March, indicating capital spending will be higher this year than last. And the alliance's capacity utilization index of firms operating at more than 85% of capacity rose to 36.7% in June from 34.3% in March. "The increases in the investment index and capacity utilization are evidence of underlying strength in manufacturing sector activity," states Norman.

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