The Economy

Indexes Differ On Manufacturing's Pace

Jan. 12, 2006

Manufacturers Alliance more positive than purchasing managers.

Two closely watched measures of U.S. manufacturing activity -- the Manufacturers Alliance's business outlook index and the Institute for Supply Management's (ISM) PMI index -- indicate growth continues. But while ISM's December index, released early this month, showed the rate of growth slowing, the alliance's index, released on Jan. 12, teasingly suggested the pace of growth was picking up.

The alliance's latest quarterly composite business outlook index was 74, an increase of eight points from three months ago and the highest index number in five calendar quarters. The index is a weighted sum of manufacturers' prospective shipments, backlogs, inventories and profit margins. An index figure above 50 signals that manufacturing activity generally is expected to increase during the next three to six months.

The index is based on a survey of senior financial executives among the alliance's 450-member firms, and "it is clear that senior financial executives believe that the manufacturing sector will continue to expand in 2006," said the Arlington, Va.-based business and public policy research group. "The results also show that various 'red flags' -- energy and commodity prices, higher interest rates, and auto and housing market trends -- have yet to shake the optimism of most executives." The alliance nevertheless emphasized its index reflects the direction of change rather than the "absolute strength" of manufacturing activity.

Fifty-one executives participated in the most recent alliance survey of current and future business conditions. Questionnaires were sent at the end of November 2005 and responses were due by Dec. 31, 2005.

The composite index's prospective shipments portion, which compares expected quarterly shipments with shipments the year before, jumped to 90% in December 2005 from 79% in September 2005. "This forward-looking index points to continued expansion in most manufacturing industries," said Donald A. Norman, the alliance economist who oversees the survey from which the composite index and several individual indexes, including some not in the composite index, are compiled.

The backlogs index, which measures the extent to which new orders exceed shipments, was 79% in December, up three points from 76% in September. "Just 8% of the respondents reported that backlogs are down from last year, while 66% said that backlogs are higher," Norman noted.

The inventory component of the composite index was barely changed in December, rising just a single percentage point to 64% from 63% three months earlier. Still, "since the index is above the 50%-level, it indicates that overall inventories are higher than one year ago," said Norman.

The profit margin index, the composite index's fourth element, rose impressively to 74% in December from 60% in September. "The profit margin index is well above the 50%-level, indicating that, for most firms, profit margins are higher than one year ago, when margins were showing improvement from their depressed levels throughout 2001-2002," Norman stated.

"This quarter's survey results show strong improvement in the individual indexes as well as the composite index," summarized Norman. "Significantly, this improvement comes at a time when most of the indexes already were at very high levels."

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.