IndustryWeek : U.S. = Manufacturers More Cautious About Future Growth

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Home :=20 Economics= =20 & Public Policy : U.S.=20 Economy : U.S. Manufacturers More Cautious About Future = Growth=20

U.S. Manufacturers More = Cautious=20 About Future Growth

Manufacturing=20 Alliance's index posts second slight decrease. =

By John S.=20 McClenahen

Oct. = 14,=20 2005 -- The manufacturing = sector of=20 the U.S. economy likely will continue to expand during the = next=20 three to six months. But the pace of growth, as = manufacturing=20 executives become more cautious in the face of rising energy = prices,=20 is likely to be slower than it has been in recent months, = indicates=20 the latest quarterly composite index of future business = activity=20 compiled by the Manufacturers Alliance/MAPI, an Arlington, = Va.-based=20 business and public policy research group. Although still = high by=20 historical standards, the index slipped to 66 in September = from 68=20 in June, with all four of its component indexes declining. = At 60,=20 the index is at its lowest since June 2003. The index's = all-time=20 high of 80 occurred in June 2004.

"Despite the decline, the index remains at a relatively = high=20 level and points to a continued expansion of manufacturing = output=20 over the next three to six months," stresses Donald A. = Norman, the=20 alliance economist who overseas a periodic survey of senior=20 financial executives from which the index is calculated. An = index=20 figure above 50 suggests that the overall manufacturing = sector is=20 expected to expand during the next three months; a figure = below 50=20 signals the sector is contracting.

"Although the composite business outlook index points to = growth=20 in manufacturing throughout the remainder of 2005 and into = 2006, it=20 does not forecast what the rate of growth will be," = emphasizes=20 Norman. The alliance's most recent quarterly economic = forecast=20 projects that U.S. manufacturing production will growth by = 3.4% this=20 year and by 2.8% in 2006.

Sixty-three senior financial executives among the = alliance's 450=20 member companies participated in its most recent survey of = current=20 and prospective business conditions. Since questionnaires = were sent=20 to them at the end of August, with replies due by September = 30, the=20 data from the survey do reflect the business impact of = Hurricane=20 Katrina.

The alliance's composite index of future business = activity is a=20 weighted sum of prospective shipments, backlogs, inventories = and=20 profit margins.

The prospective shipments index, which compares expected=20 quarterly shipments with those the year before, fell to 79% = in=20 September from 85% in June. "Nonetheless, this index remains = well=20 above the 50% level, indicating that overall manufacturing = shipments=20 in the fourth quarter of 2005 are expected to increase over=20 fourth-quarter shipments in 2004," states economist Norman. = "The=20 expected year-over-year growth is particularly significant = because=20 shipments in the fourth quarter of 2004 were growing = strongly," he=20 adds.

The backlogs index, which measures the extent to which = new orders=20 exceed shipments, slipped only slightly to 76% in September = from 78%=20 in June. "The backlogs index thus remains strong, indicating = that=20 backlogs continue to expand on a year-to-year basis," says=20 Norman.

There was a rather dramatic drop in the inventory index, = however.=20 In its second consecutive quarterly decline, the index fell = to 63%=20 in September from 71% in June.

The composite index's fourth component, the profit margin = index,=20 fell one percentage point to 60% in September from 61% in = June. "The=20 profit margin index remains well above the 50% level, = indicating=20 that, for most firms, profit margins are higher than one = year ago,=20 when margins were showing improvement from their depressed = levels=20 through 2001-2002," Norman observes. However, the profit = margin=20 index was a robust 73% a year ago and September's decrease = was the=20 fourth consecutive decline.



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