The Economy

U.S. Manufacturers More Cautious About Future Growth

Oct. 13, 2005

Manufacturing Alliance's index posts second slight decrease.

The manufacturing sector of the U.S. economy likely will continue to expand during the next three to six months. But the pace of growth, as manufacturing executives become more cautious in the face of rising energy prices, is likely to be slower than it has been in recent months, indicates the latest quarterly composite index of future business activity compiled by the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group. Although still high by historical standards, the index slipped to 66 in September from 68 in June, with all four of its component indexes declining. At 60, the index is at its lowest since June 2003. The index's all-time high of 80 occurred in June 2004.

"Despite the decline, the index remains at a relatively high level and points to a continued expansion of manufacturing output over the next three to six months," stresses Donald A. Norman, the alliance economist who overseas a periodic survey of senior financial executives from which the index is calculated. An index figure above 50 suggests that the overall manufacturing sector is expected to expand during the next three months; a figure below 50 signals the sector is contracting.

"Although the composite business outlook index points to growth in manufacturing throughout the remainder of 2005 and into 2006, it does not forecast what the rate of growth will be," emphasizes Norman. The alliance's most recent quarterly economic forecast projects that U.S. manufacturing production will growth by 3.4% this year and by 2.8% in 2006.

Sixty-three senior financial executives among the alliance's 450 member companies participated in its most recent survey of current and prospective business conditions. Since questionnaires were sent to them at the end of August, with replies due by September 30, the data from the survey do reflect the business impact of Hurricane Katrina.

The alliance's composite index of future business activity is a weighted sum of prospective shipments, backlogs, inventories and profit margins.

The prospective shipments index, which compares expected quarterly shipments with those the year before, fell to 79% in September from 85% in June. "Nonetheless, this index remains well above the 50% level, indicating that overall manufacturing shipments in the fourth quarter of 2005 are expected to increase over fourth-quarter shipments in 2004," states economist Norman. "The expected year-over-year growth is particularly significant because shipments in the fourth quarter of 2004 were growing strongly," he adds.

The backlogs index, which measures the extent to which new orders exceed shipments, slipped only slightly to 76% in September from 78% in June. "The backlogs index thus remains strong, indicating that backlogs continue to expand on a year-to-year basis," says Norman.

There was a rather dramatic drop in the inventory index, however. In its second consecutive quarterly decline, the index fell to 63% in September from 71% in June.

The composite index's fourth component, the profit margin index, fell one percentage point to 60% in September from 61% in June. "The profit margin index remains 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 through 2001-2002," Norman observes. However, the profit margin index was a robust 73% a year ago and September's decrease was the fourth consecutive decline.

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.