Not So Fast -- Manufacturers Group Sees Continued Growth

Jan. 17, 2008
Manufacturers Alliance/MAPI says exports are cushioning domestic weakness.

Many manufacturers, especially those with multinational interests, have thus far been able to fend off the severe challenges to the sector, according to the Manufacturers Alliance/MAPI Survey on the Business Outlook.The exports orders index, which measures how fourth quarter 2007 exports are expected to compare with those of fourth quarter 2006, reached an all-time high of 80%, surpassing the previous high of 79% in June 2007 and above the 75% recorded in September 2007. The rise in export orders suggests that slower growth in domestic markets is being partly offset by continued growth abroad. Most of the survey respondent companies are global manufacturers and are therefore likely to better withstand a slowdown in U.S. economic growth.

"The continued strength of these indexes and the rise in others (notably exports, investments, backlog orders, and capacity utilization) contrasts with recent economic reports suggesting the U.S. economy is slipping into recession. The optimism revealed in this quarters survey may reflect that most survey respondents are with global manufacturers whose fortunes are determined by economic trends abroad as well as those in the United States," said Donald A. Norman, Ph.D., Manufacturers Alliance/MAPI Economist and survey coordinator.

The December 2007 composite index of 64 is just one point below the 65 reported in the previous two surveys conducted in September 2007 and in June 2007. A business index above 50 indicates that overall manufacturing activity is expected to increase over the next three to six months.

A summary of the indexes is as follows:

  • The investment index, which queried executives on their expectations regarding capital investment in 2008 compared to 2007, rebounded to 74% in the December 2007 report from 62% in September 2007.
  • The capacity utilization index, based on the percentage of firms operating above 85% of capacity, rose to 46.4% in December 2007 from 41.7% in September 2007, and remains above its long-term average of 33%.
  • The research and development (R&D) index rose to 77%, which looks at spending in 2008 versus 2007. The September survey showed 75%. This helps confirm that there remains some underlying strength in manufacturing, says the Alliance.
  • Another slight increase came in the backlogs index, which compared the fourth quarter 2007 backlog of orders with the backlog of orders one year earlier. The December 2007 index of 67% represents a one point advance from 66% in the September 2007 survey. An accumulation of backlogs usually occurs when new orders exceed shipments. Also, the inventory index rose to 64% in December from 63% in September.
  • The annual orders index, based on a comparison of expected orders for all of 2008 with orders in 2007, slipped to 75% compared with 78% in the September 2007 survey.
  • The profit margin index gave back one point, falling to 68 in relation to the 69% in the September report.

In other finding, senior financial executives reported on how companies respond to a slowdown in economic activity. Fifty-nine percent of the respondents indicated that signs that sales are beginning to slow is enough to trigger the implementation of a contingency plan to deal with slower growth, while 28% said they wait for a sales slowdown that persists for two or more months. The most widely cited action companies could take in response to a slowdown, named by 74% of the respondents, was imposition of budget cuts on the divisions whose business is expected to slow, while 72% said they would reduce their labor force.

When asked if the weaker dollar helped or hurt their companies, nearly two-thirds (64%) answered in the affirmative and only 13.5% said it was a "net minus." Only 7.5% of respondents said that the credit crunch is starting to affect their businesses.

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