Manufacturing Growth Rate Likely To Slow

Oct. 12, 2006
Manufacturers Alliance index is at lowest level since June 2003.

Although the manufacturing sector of the U.S. economy remains far from a shutdown, the rate of growth among producers of durable and non-durable goods is likely to slow during the next three to six months, suggest data released Oct. 12 by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group.

The alliance's composite business outlook fell to 64 in September, down seven points from June's 71. September's mark is the lowest since June 2003, when the index was at 60. A composite index figure above 50 indicates U.S. manufacturing generally is growing; 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 floor is not expected to drop out from under the manufacturing sector," stresses Donald A. Norman, the alliance economist who oversees the quarterly membership survey from which the composite index and several indexes not include in the composite are calculated. "Overall manufacturing output is expected to increase over the next three to six months," he observes. However, the decline in the composite index, together with other survey data, "point to slower growth," Norman states.

Sixty-four senior financial executives participated in the alliance's most recent survey, which was completed less than two weeks ago.

Three segments of the composite index are clearly signaling a slowdown in manufacturing's growth rate The shipments segment, which compares anticipated quarterly shipments with actual shipments a year ago, fell to 73% in September from 83% in June, a 10-percentage point drop. The inventories segment of the composite index shot up to 73% in September from 62% in June, an 11-point increase. The backlogs segment fell four points, to 71% in September from 75% in June. Profit margins, the fourth segment of the alliance's composite business outlook index, are less definitive.

The percentage of companies reporting higher year-to-year profit margins rose to 70% in September from 63% in June. However, the percentage reporting lower profit margins also increased, rising to 20% in September from 15% in June. "The disparity in these trends suggests that while most manufacturing industries are benefiting from increasing activity, some industries -- automotive and those linked to residential construction -- are feeling the effects of reduced production," says economist Norman.

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