Manufacturing Outlook Still Strong, But Not Quite As Robust, MAPI Survey Says

Eight of 10 indexes slip, with investment, R&D readings moving higher.

Manufacturers can expect a slower pace of growth over the next three to six months, though the manufacturing industry overall remains in good shape, according to the quarterly Manufacturers Alliance/MAPI survey.

The June Composite index slipped to 71 from 74 reported in March, and eight of the 10 factors measured by the quarterly survey were lower than in the previous report.

"This quarter’s survey results send a clear signal that the rate of expansion in the manufacturing sector will continue, but at a slower pace throughout the remainder of the year,” said Don Norman, Ph.D., Manufacturers Alliance/MAPI Economist and survey coordinator. “All the indexes remain at relatively high levels in absolute terms and the increase in the investment and R&D indexes point to sustained strength in manufacturing.”

The investment index, reflecting executives’ expectations for capital investment in 2006 compared to 2005, rose to 86 percent in this survey from 81 percent in March 2006. The research and development index improved 3 percentage points, from 74 percent in March to a record 77 percent in June, and indicates an increase in R&D spending in 2006.

Along the lines of other recent economic indicators, however, the remaining indexes showed a pullback from the lofty numbers reported in the March 2006 survey.

The profit margin index declined to 74 percent in June from a record high 82 percent in March while the orders index, which compares new orders for the second quarter of 2006 with the same quarter one year ago, fell to 81 percent in June from 89 percent in March.

The forward-looking annual orders index, based on a comparison of expected orders for all of 2006 with orders in 2005, decreased to 84 percent in June from an exceptionally high 92 percent in the previous survey.

The prospective shipments index, based on expectations of prospective shipments in the third quarter of 2006 with the same quarter last year, dropped to 83 percent in June from 90 percent in the March survey.

Two other indexes each dropped 5 percentage points. The export orders index, which measures how second quarter 2006 export orders are expected to compare with those of second quarter 2005, fell to 73 percent from 78 percent. The inventory index declined to 62 percent in June from 67 percent in March, indicating inventories to be lower on a year-to-year basis, and the first decrease in this index in a year.

The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, dropped to 41.4 percent in June from 45.8 percent in March. There was, however, some positive news in this measurement as the percentage of firms operating at 80 percent of capacity or less fell significantly, to 29.3 percent from 39 percent in March.

The backlog orders index, comparing current backlogs with backlogs one year earlier, softened only slightly, to 75 percent in June from 77 percent in March. An accumulation of backlogs usually occurs when new orders exceed shipments.

The survey reflects the views on current and future business conditions of 60 senior financial executives representing a broad range of manufacturing industries. While a variety of indexes are included in the survey, the business outlook index is a weighted sum of shipments, backlogs, inventories, and profit margin indexes.

In a supplemental section of the survey, no overwhelming consensus was uncovered on trends in commodity prices and company reactions. Forty-four percent of the executives indicated that their companies hedge commodity prices to reduce price volatility, and 55 percent of those respondents indicated that success in smoothing prices has been limited. Fifty-two percent of the respondents reported that metals costs account for 16 percent or more of total production costs and 59 percent said that their companies have added surcharges on products to cover higher commodity costs. Almost half (49 percent) reported that they have been able to pass through most of the cost increases.