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MAPI: Despite Turmoil, Manufacturing Shows Strength

The September 2011 composite index fell only slightly but showed solid, continued growth in manufacturing.

Arlington, VA -- The results of the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook--September 2011 (ER-732) shows manufacturing maintaining momentum in the face of economic uncertainty. The survey's composite index is a leading indicator for the manufacturing sector. The September 2011 composite index fell only slightly, to 67 from 68 in the June report. This is the eighth consecutive quarter the index has been above the 50 percent threshold, the dividing line that separates contraction and expansion. While it also represents the fifth straight decrease from the record high of 81 in June 2010, it remains consistently high. The index started as a quarterly series in 1991.

"This quarter's survey results point to continued growth, but at a slower rate," said Donald A. Norman, Ph.D., MAPI Economist and survey coordinator. "The forward looking indexes came in at relatively high levels and at 43.3 percent capacity utilization is quite high. Despite the fact that a number of indexes fell, taken together, the results of this quarter's survey contradict the view that manufacturing sector activity is sputtering."

The composite business outlook index is a weighted sum of the U.S. shipments, backlog orders, inventory, and profit margin indexes. In addition to the composite index, the survey includes 13 individual indexes.

The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, showed the largest gain. It moved up to 43.3 percent in September from 32.3 percent in June. The index is well above the long-term average utilization rate of 32 percent. This index has reached a record low of 7 percent as recently as December 2009.

Based on a comparison of inventory levels in the third quarter of 2011 with those in the third quarter of 2010, the inventory index decreased to 74 in September from a record high 82 in June. Norman, however, views this as a positive sign since it suggests that the steady inventory build observed over the past year is slowing.

The quarterly orders index, based on a comparison of expected orders in the third quarter of 2011 with those in the same quarter one year ago, remained at 79 compared with the June survey.

Other current condition indexes showed small declines.

The export orders index, which compares exports in the third quarter of 2011 with the same quarter in 2010, was 80 in September, moving off its record high of 87 in June. The backlog orders index, which compares the third quarter 2011 backlog of orders with the backlog of orders one year earlier, fell to 73 from 83 in the previous report. Declining backlogs signal slowing activity. The profit margin index slipped to 74 in September from 78 in June.

The non-U.S. prospective shipments index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms in the fourth quarter of 2011 compared to the same quarter in 2010, fell to 85 in September from a record tying 89 in June. The U.S. prospective shipments index, which reflects expectations for fourth quarter 2011 shipments compared with the fourth quarter of 2010, dropped to 81 from 82.

The new report showed advancements in three of the four forward looking indexes. The annual September survey is the first time respondents are asked for forecasts in the following year compared to the current year.

The research and development (R&D) index reflects the views of survey participants regarding R&D spending in 2012 compared to 2011. The R&D index was 76 in this survey compared to 70 one year ago.

The non-U.S. investment index, based on expectations regarding capital expenditures abroad in 2012, was 75 compared to 73 in September 2010. The U.S. investment index is based on expectations of executives regarding domestic capital investment for 2012 compared to 2011. The index was 81, a slight increase from 80 one year prior.

The annual orders index, based on a comparison of expected orders for all of 2012 with orders in 2011, was the lone forward looking index to decline, slipping from 86 in the September 2010 report to 84 percent this September. At 84 percent, the annual orders index remains at a very high level.

In a supplemental component of the survey, respondents were asked about their companies' corporate liquidity.

Nearly 40 percent of the respondents indicated that their current liquidity ratio (as measured by cash and short-term assets as a percent of sales) has risen over the past year, identifying the economic outlook for slower growth and lack of investment opportunities as the top two factors. Respondents indicated that increased cash flow from strong operating results contributed the most to higher liquidity ratios and 85 percent said there was no pressure to increase liquidity.

MAPI's Composite Business Outlook Index (see chart below) is a historically accurate near-term preview of business prospects for the manufacturing sector and is a leading indicator of the Federal Reserve's industrial production index.