Manufacturers Will Continue to Expand, But at Slower Pace

Oct. 14, 2010
MAPI reports expectations for annual orders, investment, and R&D spending in the coming calendar year, were all at high levels.

The U.S. manufacturing sector has held up well during an uneven economic recovery and should continue to expand, but likely at a slower pace, according to the Manufacturers Alliance/MAPI. The group's September 2010 composite index fell slightly to 77% from a record high 81% in the June 2010 report.

It marks the fourth straight quarter it has reached 50% or above, the benchmark between contraction and expansion. In year-over-year comparisons, the current index is over twice that of the 38% in the September 2009 survey, signaling an impressive turnaround for industry.

"Although some indexes based on year-over-year comparisons fell slightly, all remain at very high levels," said Donald A. Norman, Ph.D., MAPI Economist."The forward looking indexes, based on expectations for annual orders, investment, and R&D spending in the coming calendar year, were all at high levels. Especially encouraging is the continued improvement in the capacity utilization index. The pace of expansion may have slowed, but growth is expected to continue."

Highlights from the survey:

*The U.S. investment index, which is based on expectations of executives regarding capital investment for 2011 compared to 2010, was 80%, a significantly improved outlook from 47% in the September 2009 survey.

*The non-U.S. investment index, based on expectations regarding capital expenditures abroad in 2011, was a solid 73%, easily outpacing last year's 52% for 2010.

*The research and development (R&D) index reflects the views of survey participants regarding R&D spending in 2011 compared to 2010. The R&D index was 70%, well above the 49% in the September 2009 report.

*The annual orders index, based on a comparison of expected orders for all of 2011 with orders in 2010, came in at 86%, compared to 66% a year ago.

*The profit margin index, which was measured against the June 2010 survey, reached a record high of 87% in September, above the 78% in MAPI's June report and surpassing the previous all-time high of 82% in the March 2006 survey.

*The capacity utilization index, based on the percentage of firms operating above 85% of capacity, improved to 28.1% in the current survey from 20% in June.

*The export orders index, which compares third quarter 2010 exports with those of third quarter 2009, was 82% in September, down marginally from a record high of 85% in June. \

*The inventory index, which is based on a comparison of inventory levels in the third quarter of 2010 with those of the prior year, increased to 63% in September from 44% in June, indicating that inventory destocking has ended for most companies.

Respondents were asked their opinion on the outlook for interest rates and whether current rates are influencing the rate of debt. Most executives (63%) indicated that they have increased or are planning to increase their companies' debt maturities in response to low interest rates, while close to one-fourth (23%) said that their company has increased or is planning to increase its reliance on debt financing in response to lower interest rates.

In addition, 69% of the respondents do not expect the Federal Reserve will raise the Federal Funds rate until sometime in the second half of 2011 or until after 2011, and 66% expect the same for longer term interest rates. Finally, given five options, 50% of the respondents believe that stronger economic growth will be the primary driver of higher long-term interest rates, while 21% believe it will be the result of Federal Reserve monetary policy.

Copyright Agence France-Presse, 2010

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