Expect the U.S. economy to cool this year - and expect the manufacturing industry to play a role in that slowdown.
The good news, though, is that the pause should be short-lived.
These are some of the findings of the latest Business Outlook Survey from the Manufacturers Alliance/MAPI released Thursday. MAPI said seven of the 10 factors measured by the quarterly survey were lower than the previous report, which is in-line with the downward trend of other recent economic indicators, while three indexes managed to show increases.
The composite index, summarizing the overall findings of the survey, dropped to 54 in the fourth quarter, from 64 in the third.
â€œThe decline in the composite index and most of the individual indexes indicates a slowdown in manufacturing activity,â€ said Donald A. Norman, Ph.D., Manufacturers Alliance/MAPI Economist and the survey coordinator. â€œNonetheless, most senior financial executives expect manufacturing activity will expand for all of 2007. The increases in the export and investment indexes also suggest that any slowdown will be of relatively short duration.â€
The poll, reflecting the views of 69 senor financial executives of member companies, showed that the orders index for the fourth quarter was 66 percent, a sharp decrease from the 77 percent in the third quarter. The percentage of those saying orders will be lower on a year-over-year basis surged to 26 percent from 12 percent, while the percentage of respondents saying new orders will be up dropped to 58 percent from 66.
Of the seven indexes that showed declines (orders, backlogs, profit margin, prospective orders, shipments, inventory and annual orders), five fell by double digits.
- Backlogs took the biggest hit, falling to 57 in the latest quarter from the third quarter.
- Profit margins dropped to 62 from 75.
- Capacity utilization, based on the percentage of firms operating above 85 percent of capacity, fell to 38.2 percent in December from 50.8 percent in September, although MAPI noted it remains well above its long-term average of 32.5 percent.
- The orders index, which compares new orders for the fourth quarter of 2006 with the same quarter one year ago, fell 11 percentage points, to 66 percent in December from 77 percent in September.
- The prospective shipments index, based on expectations of anticipated shipments in the first quarter of 2007 compared with the same quarter last year, decreased to 62 percent in December from 73 percent in the September survey.
The indexes that showed improvement in the latest survey were: investment (up 8 points, to 64); research & development, up 4 points to 74; and exports, up to 77 from 75.
When asked to name the most likely action their companies would take to increase profits, raising product prices (60.6 percent) easily topped the list. Outsourcing production (43.9) was next, and both increasing acquisitions and reducing workforce garnered 39.4 percent. The remaining responses: reducing domestic capacity (34.8); outsourcing non-production (18.2); no action - slowdown will be temporary (13.6); reduce stock buybacks and/or no dividend increases (4.5), and other (24.2).
Companies are having a somewhat easier time coping with the profit slowdown, helped by strong balance sheets and better liquidity, but they also note their focus on variable costs, and contingency planning in case of slower growth.
As for markets that are expected to see the best growth this year, not too surprisingly energy and aerospace took the top spot, while industries related to automobiles, residential construction and heavy trucks are expected to see the biggest decline.
The fastest growing geographical markets are in Asia (including China, India, Singapore and Korea) and also the U.S. South and Southwest. The laggards are seen in the U.S. Northeast, Midwest and Southeast.The latest MAPI findings shouldn't come as a major surprise. The Institute for Supply Management's widely watched monthly PMI indicator has also been pointing to slowing growth in the manufacturing industry, though the new orders component has held up relatively well, suggesting the industry remains generally healthy. To comment on this story email us at email@example.com.