Arlington, VA — April 12, 2007 — U.S. manufacturing is poised for continued growth as the year progresses, withstanding current challenges, according to the Manufacturers Alliance/MAPI Survey on the Business Outlook, a leading indicator for the industrial sector.
The March 2007 composite index of 58 is up from 54 reported in the December 2006 survey and breaks a three-quarter slide of decreases. A composite business index above 50 indicates that overall manufacturing activity is expected to increase over the next three months to six months.
Six of the 10 factors measured by the quarterly survey were higher than the previous report, foreshadowing a likely improvement in the industrial sector and providing a measure of optimism in the midst of mixed economic indicators for this sector. There were decreases in three indexes, and one remained flat. Importantly, however, the index measures the direction of change rather than the absolute strength of activity in manufacturing.
The March 2007 outlook marks a healthy turnaround from the December 2006 report in which seven of the 10 indexes were lower than the September 2006 survey.
"The survey results of this quarter are evidence of latent strength in most manufacturing industries and are a harbinger of renewed vigor in the latter half of the year," said Donald A. Norman, Ph.D., Manufacturers Alliance/MAPI economist and survey coordinator. "Most industries, with the exception of those businesses closely linked to the housing sector, should expand this year although the rate of expansion is likely to be less than in recent years."
Indices Pointing Up
The prospective shipments index, based on expectations of anticipated shipments in the second quarter of 2007 compared with the same quarter last year, showed the biggest gain, rising to 73 percent in March 2007 from 62 percent in the December 2006 survey. This marks the first increase in this forward-looking index since December 2005.
Capacity utilization, based on the percentage of firms operating above 85 percent of capacity, increased to 46.7 percent in March 2007 from 38.2 percent in December 2006 and remains well above its long-term average of 32.5 percent. Also showing a healthy gain was the investment index, which queries executives on their expectations regarding capital investment in 2007 compared to 2006. The index rose seven percentage points, to 71 percent, from 64 percent in the December 2006 survey.
The backlogs index compared the first quarter 2007 backlog of orders with the backlog of orders one year earlier. The March 2007 index of 60 percent represents a moderate improvement from 57 percent in the December 2006 survey, but more importantly it starts to reverse a large 14 percentage point drop in the previous report. An accumulation of backlogs usually occurs when new orders exceed shipments.
The annual orders index, a forecast based on a comparison of expected orders for all of 2007 with orders in 2006, returned to 80 percent in March 2007 from 78 percent in the December 2006 survey.
The research and development (R&D) index determines how executives see R&D expenditures in 2007 compared with those of 2006. This index confirms the underlying strength in manufacturing, maintaining its robust 75 percent level in March 2007, just above the 74 percent recorded in December 2006. Meanwhile, the profit margin index was flat, remaining at 62 percent, the same as in the previous report.
Indices Pointing (Slightly) Down
Three other indexes encountered a slightly downward trend.
Most significantly, the quarterly orders index, which compares new orders for the first quarter of 2007 with the same quarter one year ago, fell six percentage points, to 60 percent in March 2007 from 66 percent in December 2006. The decline in this index underscores the current slowdown in manufacturing activity. The orders index was as high as 77 percent as recently as September 2006, but any level above 50 percent still indicates growth.
The exports orders index, which measures how first quarter 2007 orders are expected to compare with those of first quarter 2006, returned to 75 percent from 77 percent in the December 2006 survey. At 75 percent, the exports orders index remains at a relatively high level. The inventory index rose to 77 percent in March 2007 from 76 percent in December 2006, indicating inventories to be higher on a year-to-year basis.
Capital vs. "Intangible" Investments
In a supplemental section of the survey, senior financial executives responded to questions relating to expenditures on intangible investments like research and development (R&D), advertising, employee training and education, process improvements, and information technology (IT), which are not expensed.
The survey found that, on average, capital investment was equal to 8.7 percent of revenue. Expenditures for intangible investments, as a percent of capital expenditures, averaged 103.5 percent. Intangible investments thus slightly exceed capital expenditures; limiting an assessment of investment behavior to capital expenditures consequently grossly understates what companies are doing with respect to future activities.
The current survey reflects the views on current and future business conditions of 60 senior financial executives representing a 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.
The Manufacturers Alliance/MAPI, established 1933, is a nonprofit organization engaged in economic and policy research, continuing professional education and allied activities. The Alliance's corporate membership includes U.S.-based and international companies in manufacturing and related business services.
The March 2007 composite index of 58 is up from 54 reported in the December 2006 survey and breaks a three-quarter slide of decreases. A composite business index above 50 indicates that overall manufacturing activity is expected to increase over the next three months to six months.
Six of the 10 factors measured by the quarterly survey were higher than the previous report, foreshadowing a likely improvement in the industrial sector and providing a measure of optimism in the midst of mixed economic indicators for this sector. There were decreases in three indexes, and one remained flat. Importantly, however, the index measures the direction of change rather than the absolute strength of activity in manufacturing.
The March 2007 outlook marks a healthy turnaround from the December 2006 report in which seven of the 10 indexes were lower than the September 2006 survey.
"The survey results of this quarter are evidence of latent strength in most manufacturing industries and are a harbinger of renewed vigor in the latter half of the year," said Donald A. Norman, Ph.D., Manufacturers Alliance/MAPI economist and survey coordinator. "Most industries, with the exception of those businesses closely linked to the housing sector, should expand this year although the rate of expansion is likely to be less than in recent years."
Indices Pointing Up
The prospective shipments index, based on expectations of anticipated shipments in the second quarter of 2007 compared with the same quarter last year, showed the biggest gain, rising to 73 percent in March 2007 from 62 percent in the December 2006 survey. This marks the first increase in this forward-looking index since December 2005.
Capacity utilization, based on the percentage of firms operating above 85 percent of capacity, increased to 46.7 percent in March 2007 from 38.2 percent in December 2006 and remains well above its long-term average of 32.5 percent. Also showing a healthy gain was the investment index, which queries executives on their expectations regarding capital investment in 2007 compared to 2006. The index rose seven percentage points, to 71 percent, from 64 percent in the December 2006 survey.
The backlogs index compared the first quarter 2007 backlog of orders with the backlog of orders one year earlier. The March 2007 index of 60 percent represents a moderate improvement from 57 percent in the December 2006 survey, but more importantly it starts to reverse a large 14 percentage point drop in the previous report. An accumulation of backlogs usually occurs when new orders exceed shipments.
The annual orders index, a forecast based on a comparison of expected orders for all of 2007 with orders in 2006, returned to 80 percent in March 2007 from 78 percent in the December 2006 survey.
The research and development (R&D) index determines how executives see R&D expenditures in 2007 compared with those of 2006. This index confirms the underlying strength in manufacturing, maintaining its robust 75 percent level in March 2007, just above the 74 percent recorded in December 2006. Meanwhile, the profit margin index was flat, remaining at 62 percent, the same as in the previous report.
Indices Pointing (Slightly) Down
Three other indexes encountered a slightly downward trend.
Most significantly, the quarterly orders index, which compares new orders for the first quarter of 2007 with the same quarter one year ago, fell six percentage points, to 60 percent in March 2007 from 66 percent in December 2006. The decline in this index underscores the current slowdown in manufacturing activity. The orders index was as high as 77 percent as recently as September 2006, but any level above 50 percent still indicates growth.
The exports orders index, which measures how first quarter 2007 orders are expected to compare with those of first quarter 2006, returned to 75 percent from 77 percent in the December 2006 survey. At 75 percent, the exports orders index remains at a relatively high level. The inventory index rose to 77 percent in March 2007 from 76 percent in December 2006, indicating inventories to be higher on a year-to-year basis.
Capital vs. "Intangible" Investments
In a supplemental section of the survey, senior financial executives responded to questions relating to expenditures on intangible investments like research and development (R&D), advertising, employee training and education, process improvements, and information technology (IT), which are not expensed.
The survey found that, on average, capital investment was equal to 8.7 percent of revenue. Expenditures for intangible investments, as a percent of capital expenditures, averaged 103.5 percent. Intangible investments thus slightly exceed capital expenditures; limiting an assessment of investment behavior to capital expenditures consequently grossly understates what companies are doing with respect to future activities.
The current survey reflects the views on current and future business conditions of 60 senior financial executives representing a 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.
The Manufacturers Alliance/MAPI, established 1933, is a nonprofit organization engaged in economic and policy research, continuing professional education and allied activities. The Alliance's corporate membership includes U.S.-based and international companies in manufacturing and related business services.
