The results of the quarterly Manufacturers Alliance for Productivity and Innovation(MAPI)Survey on the Business Outlook indicate slowing growth for U.S.manufacturing over the next three to six months.But despite posting a 5 percentage point drop between June and September-the largest of nine consecutive quarterly declines-the survey's composite index offers cause for optimism.According to Donald A.Norman,Ph.D.,MAPI senior economist and survey coordinator,that optimism need not be qualified with the word"cautious".
"There is so much uncertainty out there,and executives are very reluctant to act until things play out,"says Norman,citing the Eurozone crisis,the election and the fiscal cliff."But in talking with people,I don't get the sense that the sky is falling.We're slowing,and we recognize that,but we are still expanding and expecting continued growth."
The survey's Composite Business Outlook Index,a leading indicator for the manufacturing sector,fell to 56 in September from 61 in the June 2012 survey,which in turn reported a 4 point drop.Despite the decline,the index remains above the threshold of 50,the dividing line that separates contraction and expansion.The index is a weighted sum of the Prospective U.S.Shipments,Backlog Orders,Inventory,and Profit Margin Indexes.
Norman is careful to distinguish the survey results from a forecast,instead classifying it as a business sentiment indicator that illustrates the general direction of the industry for the next three to six months.He also notes that the composite index is not a measure of absolute production.Rather,the survey's 13 individual indexes largely consist of year-over-year comparisons,which contributed to the composite index's record high of 81 in June 2010.That survey reflected the release of pent-up demand,when production rates spiked as high as four times GDP."You simply can't have the manufacturing sector grow so disproportionately for a long time,"says Norman."Over the long term,it's got to stay more or less in step with the general economy."
As the curve stabilizes,there is cause for good news even within falling indexes.In the case of the Inventory Index's significant decrease to 58 in September from 73 in June,the figures reflect an improvement in inventory movement and management,according to Norman.When business slows,inventories rise,and the composite index goes down,he says."But when inventory falls and is accompanied by positive readings in orders and shipments,that is good news.Companies are having some success shedding excess inventory."
Norman pointed to the Annual Orders Index,which is based on a comparison of expected orders for all of 2013 with orders in 2012.The index eased to 75 in September 2012 from 84 in September 2011,he says,remaining at an impressive level.
In looking forward,the survey's indexes reflect the views of 60 senior financial executives representing a broad range of manufacturing industries.When reading into the aggregate responses,Norman says he pays close attention to the Current Order Index,the Backlog Orders Index and the Export Orders Index."All have come down sharply,"he says."The next quarter will be eye-opening,because either things will flatten out,or if they fall below 50 we will enter a contractionary phase.We are not there yet.We see growth continuing at a slower rate than it has been,but a lot can change very rapidly."
More results from the survey's indexes:
The Current Orders Index,a comparison of expected orders in the third quarter of 2012 with those in the same quarter one year ago,declined to 57 in September from 70 in the June survey.
The Export Orders Index,which compares exports in the third quarter of 2012 with the same quarter in 2011,also saw a double-digit drop,to 53 in the current survey from 63 in June.
The Capacity Utilization Index,which shows the percentage of firms operating above 85%of capacity,dropped to 28.8%in September from 35.2%in June and is now below the long-term average of 32%.
The Backlog Orders Index,which compares the third quarter 2012 backlog of orders with that of one year earlier,fell to 53 from 58 in the June report.The??Profit Margin Index slipped only marginally,to 67 in September from 68 in June.
The Prospective U.S.Shipments Index,which reflects expectations for fourth quarter 2012 shipments compared with the fourth quarter of 2011,dropped to 60 in September from 75 in the previous report.
The Prospective Non-U.S.Shipments Index,which measures expectations for shipments abroad by foreign affiliates of U.S.firms for the same time frame,fell to 56 in the current report from 60 in the June survey.
The Interest Rate Expectations Index was the lone index to increase,to 56 from 51,indicating sentiment that longer-term interest rates are still expected to rise by the end of the fourth quarter of 2012.
The U.S.Investment Index is based on executive's expectations regarding domestic capital investment for 2013 compared to 2012.The index was 54 in September,a precipitous drop from 81 in the September 2011 survey.
The Non-U.S.Investment Index,based on expectations regarding capital expenditures abroad in 2013 compared to 2012,also showed significant softening to 60 in the September 2012 report compared to 75 one year ago.
The Research and Development Spending Index surveys participants regarding R&D spending in 2013 compared to 2012.The index was 68 in the current report compared to 76 in September 2011.
In a supplemental section,participants were queried on the potential for the U.S.economy going over the"fiscal cliff"if tax increases and spending cuts are enacted starting January 1,2013.Eighty-three percent of the respondents believe that going over the fiscal cliff would have a moderately negative to very negative impact on their company.Just 8.6%said the impact would be minimally negative.
Many companies have already responded to the possibility of going over the fiscal cliff.Thirty-four percent of respondent firms have delayed adding to their workforce because of concerns about the fiscal cliff while 17%have scaled back or put on hold planned capital investments.
Respondents were asked to indicate what they thought was the biggest threat to the economy.Forty-two percent said the potential spread of the banking crisis in Europe to the United States was the biggest threat,39%cited congressional failure to prevent the fiscal cliff,and only 7%cited slowing growth in China.
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.
