Over the next three to six months, the industrial sector is headed for a slight slowdown after a significant three-year growth spurt, according to the Manufacturers Alliance/MAPI Survey on the Business Outlook (ER-618e) released Thursday.
The September 2006 composite index of 64 is down from 71 as reported in the June 2006 survey.Although this number is the lowest since an index of 60 was recorded in the June 2003 survey, it does show that the industrial sector of the U.S. economy is still growing.
Even though the composite index and several individual indexes indicate slower growth, several of the indexes rose, significant among them exports and capacity utilization.
“Further, all of the indexes remain well above the 50 percent level, indicating that the overall manufacturing sector will continue expanding over the next three to six months,” said Daniel J. Meckstroth, Ph.D., Manufacturers Alliance/MAPI Chief Economist.
Of the 10 factors measured by the quarterly survey, seven were lower than the previous report, confirming the downward trend of other recent economic indicators, while three indexes showed increases, and one reached an all-time record.
The exports orders index, which measures how third quarter 2006 orders are expected to compare with those of third quarter 2005, rose to 75 percent from 73 percent in the June survey, and the profit margin index inched up to 75 percent from 74 percent in the previous report.
The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, increased to 50.8 percent in September from 41.3 percent in June. This is close to its record high of 51.0 percent and well above its long-term average of 32.4 percent.
In the September survey, the investment index queried executives for their initial insights regarding capital investment in 2007 compared to 2006. This index dropped 14 points, to 56 percent, from 70 percent a year ago, a forecast of a softening manufacturing environment.
Capital spending is now declining, as manufacturers match spending to replacement needs, as normally occurs in the business cycle, he added. This natural deceleration in capital spending is not an indicator of a declining manufacturing market, especially in light of current strong corporate profits and factory operating rates that are at 81 percent.
Two additional indexes also showed some significant changes. The inventory index jumped to 73 percent in September from 62 percent in June, indicating inventories to be higher on a year-to-year basis. The prospective shipments index, based on expectations of prospective shipments in the fourth quarter of 2006 with the same quarter last year, decreased to 73 percent in September from 83 percent in the June survey.
The forward-looking annual orders index, based on a comparison of expected orders for all of 2007 with orders in 2006, decreased to 80 percent in September from 83 percent in September 2005. The backlogs index, comparing third quarter 2006 backlogs with backlogs one year earlier, dipped to 71 percent in September from 75 percent in the June survey. When new orders exceed shipments, an accumulation of backlogs is a typical occurrence.
The orders index, which compares new orders for the third quarter of 2006 with the same quarter one year ago, showed a similar moderation, falling to 77 percent in September from 81 percent in June. The research and development (R&D) index determines how executives see R&D expenditures in 2007 compared with those of 2006. This index was similar to last year, dropping to 70 percent in September 2006 from 72 percent in September 2005.