Industrial Sector Ready to Rebound, Survey on the Business Outlook Indicates

Index from Manufacturers Alliance/MAPI jumps to 57 percent from 38 percent, highest since March 2008; expectations for growth emerge as inventories remain near record lows

1263663880708 10326617
Arlington, VA — January 18, 2010 — The long-awaited recovery in the manufacturing sector may be clearly in sight, as a leading indicator for the industrial sector staged a significant rebound at the end of last year.

In its quarterly "Survey on the Business Outlook" for December 2009, the Manufacturers Alliance/MAPI reported that its composite index rose to 57 percent from 38 percent reported in the September 2009 report, representing the highest level since the March 2008 survey also registered 57 percent, and the first time in six quarters it has reached 50 percent or above.

At its current level, the index indicates that overall manufacturing activity is expected to grow over the next three to six months. It should also be noted that the index measures the direction of change rather than the absolute strength of activity in manufacturing.

"Since many of the indexes are based on comparisons with activity in the fourth quarter of 2008, during which manufacturing sector activity had taken a sharp downward turn, the improvement in the composite index is not, by itself, evidence of a meaningful recovery," said Donald A. Norman, MAPI economist and survey coordinator. "The extent to which the individual indexes improved, however, along with the significant increases in the forward looking annual orders and investment indexes, provide the strongest indication to date that the manufacturing sector is on the upswing."

While a variety of individual indexes are included in the survey, the business outlook index is a weighted sum of U.S. shipments, backlogs, inventories and profit margin indexes. Eleven of 12 individual indexes showed improvement, including 10 by double digits.

Two components showed impressive 31-percentage point gains. The quarterly orders index, based on forecasts for the fourth quarter of 2009 with the same quarter one year ago, rose to 42 percent from 11 percent in the previous survey. The non-U.S. prospective shipments index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms, jumped to 64 percent in the first quarter of 2010, compared to 33 percent in the same quarter of 2009.

The U.S. prospective shipments index, which similarly reflects expectations for first quarter 2010 shipments compared with the first quarter of 2009, improved to 59 percent in the December survey compared to 30 percent in the September report. The export orders index, which compares fourth quarter 2009 exports with those of fourth quarter 2008, increased to 47 percent in December from 19 percent in the September survey.

The backlogs index, which compares the fourth quarter 2009 backlog of orders with the backlog of orders one year earlier, rose to 36 percent from 16 percent in the September survey. An accumulation of backlogs usually occurs when new orders exceed shipments.

The U.S. investment index, which queried executives on their expectations regarding capital investment in 2010, was 66 percent, up from 47 percent, indicating increased domestic investment this year. The non-U.S. investment index provides insight into expectations regarding capital expenditures abroad. The December 2009 index was 68 percent, a solid improvement over the 52 percent recorded in September, indicating a significant number of respondent companies are anticipating capital spending growth outside the United States.

The research and development (R&D) index asked survey participants for their insights regarding R&D spending in 2010 compared to 2009. The R&D index was 66 percent, well above the 49 percent in the previous survey.

The annual orders index, based on a comparison of expected orders for all of 2010 with orders in 2009, was an impressive 80 percent in December compared to 66 percent in September. The profit margin index increased to 38 percent in December from 22 percent in the September report, a solid improvement but still remaining under 50 percent.

The inventory index is based on a comparison of inventory levels in the fourth quarter of 2009 with those of one year prior. It increased to 8 percent in December from a record low of 7 percent in September. This remains a positive sign indicating that manufacturers will need to increase production for restocking purposes and for new orders.

The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, was the lone index to decrease, dropping to 7 percent in the current survey from 8.4 percent in the previous survey. On a more positive note, though, the percentage of firms operating below 75 percent of capacity fell to 52.6 percent from 56.7 percent.

The survey reflects the views on current and future business conditions of 59 senior financial executives representing a range of manufacturing industries.