Following two successive declines, the quarterly composite index of future business activity in the manufacturing sector of the U.S. economy compiled by the Manufacturers Alliance/MAPI increased slightly in March. The index now stands at 71, up one point from 70 in December 2004, but still below last September's 75 and the index's all-time high of 80 in July 2004. The Arlington, Va.-based business and public policy research group released its latest data on April 14.
Although release of the group's leading indicator comes as some economists are significantly revising downward their forecasts for overall U.S. GDP growth for the first and second calendar quarters of 2005, "an index of 71 is very strong in absolute terms and signals that manufacturing output is expected to increase over the next three months," says Donald A. Norman, the alliance economist who overseas the survey of senior financial executives from which the index is calculated. "It is clear that most senior financial executives are confident that their companies will continue growing in 2005."
The alliance's composite index of future business activity is a weighted sum of prospective shipments, backlogs, inventories and profit margins. An index number above 50 indicates that the manufacturing sector generally is expanding; a figure below 50 signals that manufacturing generally is expected to decline during the next calendar quarter. The alliance stresses that its index measures the direction of change rather than the absolute strength of the U.S. manufacturing sector.
Some 67 senior financial executives in alliance member companies took part in the latest survey of current and future business conditions. Questionnaires were sent to them at the beginning of March, with responses due by March 29.
Delving into the overall index's details, the prospective shipments index rose to 91% in March 2005 from 86% in December 2004. In March, 84% of survey respondents expected shipments to rise, up from 79% in December of last year. Only 1% of respondents expected shipments would be lower.
The backlogs index was 81% in March, down from December's 85%. "The backlogs index remains strong, however, and shows that backlogs are expanding on a year-to-year basis," says economist Norman. "Just 9% of the respondents reported that backlogs are down from last year, while 71% said backlogs are up."
The inventory index rose to 74% in March from 72% last December, with 66% of survey respondents reporting inventories higher than a year ago and only 18% saying inventories were lower. "The fact that inventories have increased over the past year reflects rising demand for manufactured goods as well as expectations that demand will continue growing," says Norman.
The profit margin index slipped a single point in March, to 66% from 67% in December. Nevertheless, adds Norman, "the profit margin index remains well above the 50% level, indicating that, for most firms, profit margins are higher than one year ago when they were recovering from a rather severe decline."
Although not included in its composite index of future business activity, significantly the alliance's index of export orders reached a record high of 90% in March. The previous all-time high was last December's 89%. "At 90%, the index indicates that export orders for most manufacturing industries will be higher for the first quarter [of 2005] on a year-to-year basis," notes Norman. "The strength of this index is attributable in part to the decline of the [U.S.] dollar against most major currencies."
Indeed, 68% of the alliance's survey respondents said their companies had benefited from currency translations associated with the fall of the dollar, and 35% claimed the fall in the dollar's value had resulted in increased exports. Some 21% said they have benefited from the dollar's fall because imports from Europe are more expensive. Some 21% said they've been hurt because exports from facilities abroad are more expensive. Only 13% of the respondents said their companies have not been affected very much by the decline in the dollar's value. (The survey allowed for multiple responses.)