Composite Index Edges Down to 65 from 66, 10th Straight Quarter Above 50 Yet 7th Consecutive Marginal Decline; Senior Financial Executives Surveyed on 2012 Earnings Outlook
Arlington, VA. — The results of the quarterly Manufacturers Alliance for Productivity and Innovation (MAPI) Survey on the Business Outlook—March 2012 (EO-104) indicate an overall picture of continued growth for the industrial sector, but at a more moderate pace during 2012.
The survey’s composite index is a leading indicator for the manufacturing sector. The March 2012 composite index fell slightly to 65 from 66 in the December 2011 survey. Despite the decline—its seventh straight since reaching a record high of 81 in June 2010—the index remains well above the threshold of 50, the dividing line that separates contraction and expansion.
“The composite index slipped once again, but not by much,” said Donald A. Norman, Ph.D., MAPI Senior Economist and survey coordinator. “Further, most of the individual indexes increased over their December levels, providing support for the view that expansion will continue, even if at a more modest pace,”
The Composite Business Outlook Index is a weighted sum of the Prospective U.S. Shipments, Backlog Orders, Inventory, and Profit Margin Indexes. In addition to the composite index, which reflects the views of 59 senior financial executives representing a broad range of manufacturing industries, the survey includes 13 individual indexes that are split between current business conditions and forward looking prospects.
Four of the six current business condition indexes showed improvement and remain at relatively high levels.
The Export Orders Index, which compares exports in the first quarter of 2012 with the same quarter in 2011, was 79 in the current survey, moving up from 71 in December.
The Current Orders Index, based on a comparison of expected orders in the first quarter of 2012 with those in the same quarter one year ago, climbed to 77 in March from 70 in the December survey.
The Backlog Orders Index, which compares the first quarter 2012 backlog of orders with that of one year earlier, improved to 71 from 67 in the previous report.
The Capacity Utilization Index, based on the percentage of firms operating above 85 percent of capacity, also showed marginal advancement. It rose to 40.0 percent in March from 38.1 percent in December and remains well above the long-term average of 32 percent.
The Profit Margin Index slipped to 69 in March from 70 in December.
Based on a comparison of inventory levels in the first quarter of 2012 with those in the first quarter of 2011, the Inventory Index decreased to 67 in March from 73 in December. Norman, however, views this as a positive sign because it suggests that the steady inventory build observed over the past 18 months is slowing.
Four forward looking indexes improved while three declined. All remain at relatively high levels.
The Prospective Non-U.S. Shipments Index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms in the second quarter of 2012 compared to the same quarter in 2011, gained six points, to 77 in the current report from 71 in the December survey. The Non-U.S. Investment Index, based on expectations regarding capital expenditures abroad in 2012 compared to 2011, was 77 in the March report compared to 72 in December.
The Annual Orders Index, based on a comparison of expected orders for all of 2012 with orders in 2011, improved to 88 in March from 86 in December, thus remaining at an impressive level. The U.S. Investment Index is based on executives’ expectations regarding domestic capital investment for 2012 compared to 2011. The index was 74 in March, up slightly from 73 in December.
The Prospective U.S. Shipments Index, which reflects expectations for second quarter 2012 shipments compared with the second quarter of 2011, dropped to 77 in March from 83 in the previous report.
The Research and Development Spending Index surveys participants regarding R&D spending in 2012 compared to 2011. The index was 76 in the March report compared to 77 in December.
Finally, the Interest Rate Expectations Index was 62 (down from 63), continuing the sentiment that longer-term interest rates are expected to rise by the end of the second quarter of 2012.
In a supplemental section, participants were queried on the earnings outlook for 2012 and the factors that could impact the outlook both in a positive and negative way.
Only 17 percent of respondents reported that the overall outlook for earnings has deteriorated over the last three months, 39 percent said the outlook has improved, and 44 percent said there has been no change.
Earnings in 2012 are expected to increase in the U.S., the Eurozone, China, and the rest of Asia and Latin America. The outlook was strongest in the U.S., with a diffusion index of 90, and weakest in the Eurozone, with a diffusion index of 54.
Top-line growth from U.S. sales is expected to be the largest contributor to earning in 2012; 58 percent of respondents indicated that it is either a very positive or moderately positive factor for earnings growth.
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.