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Survey On Business Outlook: Index Slips, Still Shows Strength

Manufacturers Alliance/MAPI survey shows March's composite index fell slightly to 72 percent from 75 percent in the December 2010 report.

ARLINGTON, VA.  -- The results of the quarterly Manufacturers Alliance/MAPI Survey on the Business Outlook -- March 2011 (ER-720) suggest a continued growth trend for manufacturing, although the rate of growth may start slowing later this year.  The survey’s composite index is a leading indicator for the manufacturing sector.  The March 2011 composite index fell slightly to 72 percent from 75 percent in the December 2010 report.   This is the sixth consecutive quarter the index has been above the 50 percent threshold, the dividing line that separates contraction and expansion.  The index started as a quarterly series in 1991.

The current index is a dramatic improvement from the record low 21 percent recorded two years ago in the March 2009 survey, signaling that a turnaround for industry continues.

“The results of the March survey show the indexes to be strikingly robust and relatively stable,” said Donald A. Norman, Ph.D., MAPI Economist and survey coordinator.   “As such, they paint a clear and consistent picture of continued growth in manufacturing sector activity.”

The business outlook index is a weighted sum of U.S. shipments, backlogs, inventories, and profit margin indexes.  In addition to the composite index, the survey includes 12 individual indexes.  There were no dramatic shifts in most of the individual indexes between the December and March surveys.

The quarterly orders index, based on a comparison of expected orders in the first quarter of 2011 with those in the same quarter one year ago, increased to 91 percent in March from 87 percent in December.  The non-U.S. investment index, based on expectations regarding capital expenditures abroad in 2011, was a solid 79 percent in March compared to an already strong 75 percent in December.  

The research and development (R&D) index reflects the views of survey participants regarding R&D spending in 2011 compared to 2010.  The R&D index was 75 percent in March, slightly above the 73 percent in the December report.  The U.S. prospective shipments index, which reflects expectations for second quarter 2011 shipments compared with the second quarter of 2010, edged up to 89 percent in the March survey from 88 percent in the December report.

Three indexes were unchanged from the previous report.

The annual orders index, based on a comparison of expected orders for all of 2011 with orders in 2010, remained at 90 percent from the December to the March survey.  The export orders index, which compares exports in the first quarter of 2011 with the same quarter in 2010, stayed at 80 percent.  The backlog orders index, which compares the first quarter 2011 backlog of orders with the backlog of orders one year earlier, held steady at 83 percent.  An accumulation of backlogs usually occurs when new orders exceed shipments.  

One component perhaps hinting at some reduced momentum is the inventory index, based on a comparison of inventory levels in the first quarter of 2011 with those of the prior year.  The index increased to 79 percent in March from 69 percent in December.   The profit margin index fell to 76 percent in March from a very strong 85 percent in December.  

The non-U.S. prospective shipments index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms in the second quarter of 2011 compared to the same quarter of 2010, decreased to 84 percent from 89 percent.

The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, slipped to 30.7 percent in the current survey from 33.3 percent in December.  The index continues to hover around the long-term average utilization rate of 32 percent after reaching a record low of 7 percent as recently as December 2009.

The U.S. investment index is based on expectations of executives regarding domestic capital investment for 2011 compared to 2010.  The index was 79 percent, a nominal retreat from 81 percent in the previous survey.

In a supplemental component of the survey, respondents were asked about their outlook for, and impact of, rising commodity prices.

Slightly more than half, 54.7 percent, expect prices will rise moderately throughout the year while 37.5 percent expect prices will rise initially before leveling off.  Prices of oil and petroleum products, named by 37.3 percent of the participants, are expected to experience the largest increases, followed by steel at 25.4 percent.
Fifty percent of the respondents indicate that rising commodity prices are having a “moderate” to “significant” impact on profit margins.  Most companies (82 percent) are not increasing inventories of commodities whose prices are expected to increase this year, while 26.2 percent are purchasing futures contracts as a hedge against future increases in commodity prices.

The survey reflects the views on current and future business conditions of 67 senior financial executives representing a broad range of manufacturing industries.